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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 27, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission File Number 001-36861
Lumentum Holdings Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
47-3108385
(I.R.S. Employer
Identification Number)
400 North McCarthy Boulevard, Milpitas, California 95035
(Address of principal executive offices including Zip code)
(408) 546-5483
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of exchange on which registered
Common Stock, par value of $0.001 per share
Nasdaq Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o
No x
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o
No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x
No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes x
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best
of the Registrant's knowledge, in definitive proxy or information statements incorporated by
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reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting
company
x
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o
No x
As of December 27, 2014 , the last day of the Registrant’s second fiscal quarter, the Registrant's common stock was not publicly traded.
As of August 22, 2015, the Registrant had 58,917,552 shares of common stock outstanding.
Table of Contents
PART I
ITEM 1.
BUSINESS
ITEM 1A.
RISK FACTORS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURE
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Page
PART II
ITEM 5.
ITEM 6.
ITEM 7.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
FINANCIAL STATEMENTS SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
ITEM 9B.
OTHER INFORMATION
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
SIGNATURES
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3
12
26
27
27
27
28
29
30
45
46
79
79
79
80
85
92
95
102
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FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K which are not historical facts are forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). A forward-looking statement may contain words such as "anticipates," "believes," "can,"
"can impact," "could," "continue," "estimates," "expects," "intends," "may," "ongoing," "plans," "potential," "projects," "should," "will," "will continue to be,"
"would," or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking
statements include statements such as:
•
•
•
•
•
•
•
•
•
•
•
our expectations regarding demand for our products, including continued trends in end-user behavior and technological advancements that may drive
such demand;
our belief that the Company is well positioned to benefit from certain industry trends and advancements, and our expectations of the role we will play in
those advancements;
our plans for growth and innovation opportunities;
our corporate structure, including our plans with respect to the appropriate number and composition of our reportable segments;
financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of
seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition
and pricing pressures, the future impact of certain accounting pronouncements and our estimation of the potential impact and materiality of litigation;
our plans for continued development, use and protection of our intellectual property;
our strategies for achieving our current business objectives, including related risks and uncertainties;
our plans or expectations relating to investments, acquisitions, partnerships and other strategic opportunities;
our strategies for reducing our dependence on sole suppliers or otherwise mitigating the risk of supply chain interruptions;
our research and development plans and the expected impact of such plans on our financial performance; and
our expectations related to our products, including costs associated with the development of new products, product yields, quality and other issues.
Management cautions that forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that
could cause our actual results to differ materially from those projected in such forward-looking statements. These forward-looking statements are only predictions
and are subject to risks and uncertainties including those set forth in Part I, Item 1A "Risk Factors" and elsewhere in this Annual Report on Form 10-K and in
other documents we file with the Securities and Exchange Commission. Forward-looking statements are made only as of the date of this Report and subsequent
facts or circumstances may contradict, obviate, undermine or otherwise fail to support or substantiate such statements. Except as required by law, we are under no
duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform such statements to actual results or to changes
in our expectations.
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ITEM 1. BUSINESS
General
Overview
PART I
Lumentum Holdings Inc. ("we", "our" or "Lumentum") is an industry leading provider of optical and photonic products by revenue and market share
addressing a range of end-market applications including data communications ("Datacom") and telecommunications ("Telecom") networking and commercial
lasers ("commercial lasers") for manufacturing, inspection and life-science applications. We are using 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 3-D
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 our network equipment manufacturer ("NEM") 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.
We operate in two reportable segments: Optical Communications (“OpComms”) and Commercial Lasers (“Lasers”). Our operations for these reportable
segments are not distinct and separate; rather this segmentation reflects different end-markets with their own unique dynamics.
We have a global marketing and sales footprint that enables us to exploit global market opportunities for our products. We have manufacturing capabilities
and facilities in North America, Asia-Pacific and Europe, Middle East and Africa ("EMEA") with employees engaged in R&D, administration, manufacturing,
support and sales and marketing activities. Our headquarters are located in Milpitas, CA and we employed approximately 1,550 full-time employees around the
world as of June 27, 2015 .
Lumentum was incorporated in Delaware as a wholly owned subsidiary of JDS Uniphase Corporation (“JDSU”) on February 10, 2015 and comprises the
communications and commercial optical products (“CCOP”) segment and WaveReady product lines formerly of JDSU. Lumentum’s Registration Statement on
Form 10 ("Registration Statement") was declared effective by the U.S. Securities and Exchange Commission on July 16, 2015. On August 1, 2015, we became an
independent publicly-traded company through the distribution by JDSU to its stockholders of 80.1% of our outstanding common stock (the “Separation”). Each
JDSU stockholder of record as of the close of business July 27, 2015 received one share of Lumentum common stock for every five shares of JDSU common stock
held on the record date. JDSU was renamed Viavi Solutions Inc. (“Viavi”) and at the time of distribution, retained ownership of 19.9% of Lumentum’s outstanding
shares. Our common stock began trading “regular-way” under the ticker “LITE” on the NASDAQ stock market on August 4, 2015.
Our business traces its origins to Uniphase Corporation, which was formed in 1979, and became publicly traded in 1992. Uniphase was originally a supplier
of commercial lasers, and later, a leading supplier of optical transmission products. In 1999, JDS Fitel Inc., a pioneer in products for fiber optic networking which
was formed in 1981, merged with Uniphase to become JDSU, a global leader in optical networking. Subsequent acquisitions by JDSU have broadened the depth
and breadth of our team, intellectual property, technology and product offerings. Notable amongst these acquisitions in the OpComms business are Agility
Communications, Inc. in 2005 and Picolight, Inc. in 2007 which respectively brought widely tunable, long wavelength laser technology for metro and long haul
networking applications and short wavelength vertical-cavity surface-emitting laser technology for enterprise and datacenter networking applications. These
acquisitions brought industry leading fundamental laser component technologies, which form the basis of virtually all optical networks today and will continue to
do so for the foreseeable future, and enable us to develop highly integrated products to satisfy our communications customers’ ever increasing needs for smaller,
lower power and lower cost optical products. Notable acquisitions in the Lasers business were Lightwave Electronics Corporation in 2005 and Time-Bandwidth
Products in 2014. Both of these Lasers acquisitions brought high power pulsed solid-state laser products and technology to our business which address the micro
laser machining market and expanded our addressable market.
Industry Trends and Business Risks
Our business is driven by end-market applications which benefit from the performance advantages that optical solutions enable.
The OpComms markets we serve are experiencing continually increasing needs for higher data transmission speeds, fiber optic network capacity and network
agility. This is driven by exponential growth in both the number of higher bandwidth
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broadband connections, notably those associated with mobile devices, such as high-definition video, online gaming, cloud computing and the number and scale of
datacenters that require fiber optic links to enable the higher speeds and increased scale necessary to deliver high bandwidth video and other services. Our
technology, which was originally developed for communications applications is also finding use in other emerging market opportunities including 3-D sensing
applications that employ our laser technology to enable the use of natural body gestures to control electronic devices.
In the Lasers markets, customer demand is driven by the need to enable faster, higher precision volume manufacturing techniques with lower power
consumption, reduced manufacturing footprint and increased productivity. These capabilities are critical as industries develop products that are smaller and lighter,
increasing productivity and yield and lowering their energy consumption.
Our optical and laser solutions, developed in close collaboration with OEM partners, are well positioned to meet demand resulting from these trends.
However, we expect to continue to encounter a number of industry and market risks and uncertainties. These risks and uncertainties may limit our visibility,
and consequently, our ability to predict future revenue, profitability and general financial performance, and could create quarter over quarter variability in our
financial measures. For example, recently, the significant strengthening of the U.S. dollar relative to certain foreign currencies, namely the Japanese Yen, has made
our competitors who operate in those foreign currencies more competitive. Additionally, continued economic issues in Europe have led to uncertain demand in our
OpComms segment. We cannot predict when or to what extent these uncertainties will be resolved. Our revenues, profitability and general financial performance
may also be affected by: (i) strong pricing pressures, particularly within our OpComms markets, due to, among other things, a highly concentrated customer base,
increasing competition, particularly from Asia-Pacific-based competitors, and a general commoditization trend for certain products; (ii) high product mix
variability which affects revenue and gross margin; (iii) fluctuations in customer buying patterns, which cause volatility in demand, revenue and profitability; (iv)
the current trend of communication industry consolidation, which is expected to continue, that directly affects our customer bases and adds additional risk and
uncertainty to our financial and business projections; and (v) the Separation which may result in disruptions to, and negatively impact our relationships with, our
customers and other business partners.
Reportable Segments
The table below discloses the percentage of our total net revenue attributable to our two reportable segments. In addition, it discloses the percentage of our
total net revenue attributable to our product offerings which serve the Telecom and Datacom markets, which accounted for more than 10% of our combined net
revenue in each of the last three fiscal years, and our product offerings for the Consumer and Industrial markets, which represent the remainder of OpComms
revenue:
Optical Communications:
Telecom
Datacom
Consumer and Industrial
Lasers
June 27, 2015
Years Ended
June 28, 2014
June 29, 2013
82.9%
60.6%
17.4%
4.9%
17.1%
85.0%
60.6%
14.3%
10.1%
15.0%
84.8%
66.9%
11.9%
6.0%
15.2%
For further information regarding our operating segments, please refer to "Note 14 Operating Segments and Geographical Information" to the audited annual
combined financial statements.
OpComms
Our OpComms portfolio includes products used by Telecom and Datacom NEMs and both traditional and cloud/data center service providers. These products
enable the transmission and transport of video, audio and text data over high-capacity fiber optic cables. Transmission products primarily consist of optical
transceivers, including innovative products such as the Tunable Small Form-factor Pluggable Plus transceiver, as well as optical transponders, and their supporting
components such as modulators and source lasers. Transport products primarily consist of modules or sub-systems containing optical amplifiers, reconfigurable
optical add/drop multiplexers ("ROADMs") or Wavelength Selective Switches, Optical Channel Monitors and their supporting components such as liquid crystal
on silicon switching engines, pump lasers, passive devices and Arrayed
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Waveguide Gratings. Many of today’s most advanced optical networks are built on our transport and transmission components, modules and subsystems.
Our products for 3-D sensing applications, formerly referred to as our gesture recognition products, include our light source product. Customer solutions
containing our 3-D sensing products let a person control electronic or computer devices with natural body or hand gestures instead of using a remote, mouse or
other device. Emerging 3-D sensing systems simplify the way people interact with technology and are first being used in applications for gaming platforms.
Markets
Our OpComms products include a wide range of components, modules and subsystems to support and maintain customers in our two primary markets:
Telecom, including service provider networks for access (local), metro (intracity), long-haul (city-to-city and worldwide) and submarine (undersea) networks and
Datacom for enterprise, cloud and data center applications, including SANs, LANs and WANs. Additionally, our OpComms products include certain laser diode
products addressing consumer and industrial applications such as our products that address 3-D sensing applications.
Customers
Our OpComms customers include Alcatel-Lucent International, Ciena Corporation, Cisco Systems, Inc., Coriant GmbH, Fujitsu, Google Inc., Huawei
Technologies Co. Ltd., Microsoft Corporation and Nokia Networks. During fiscal 2015, 2014 and 2013, net revenue generated from a single customer which
represented greater than 10% of our total net revenue is summarized as follows ( in millions ):
Ciena
Google
Cisco
*Represents less than 10% of total net revenue
**The customers listed in the table above are attributable to our OpComms segment.
Trends
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
$
$
120.4 $
*
98.7
130.2 $
84.6
* $
125.6
*
87.7
To remain competitive, network operators worldwide must offer broader suites of digital services. To do this, they are migrating to Internet-protocol (“IP”)
networks and expanding long-haul, metro regional and metro access networks, which effectively deliver broadband services while lowering capital and operating
costs of dense-wavelength-division multiplexing networks.
Demand for capacity in the Datacom market is driven by the growing needs of intra-company local-area networks ("LANs") and inter-company wide-area
networks ("WANs). Datacom is also driven by web and cloud services companies that are expanding data center infrastructure, increasing the need for network
capacity within and between these data centers. The growing demand for capacity encourages the adoption of OpComms products across the Datacom and
Telecom markets.
Demand in the Telecom market is driven by new bandwidth-intensive applications that can result in sudden and severe changes in demand almost anywhere
on the network. Increasing agility in optical networks by employing ROADMs, Wavelength Selective Switches, wavelength tunable transmission products and
other agile optical products provides an effective way to respond to unpredictable bandwidth demands and to manage expenses. With more agile optical networks,
a service provider can add capacity by using remote management applications rather than dispatching technicians to perform manual operations in the field.
In addition, the high-end routers, switches and cross-connect equipment that must handle legacy and internet-protocol traffic are becoming increasingly
complex in order to meet higher bandwidth, scalability, speed and reliability needs. Products must provide higher levels of functionality and performance in
compact designs that must also meet requirements for quality, reliability and cost.
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Deployment of fiber closer to the end user increases the availability of high-bandwidth services and should result in increased demand on the metro regional
and long-haul networks into which these services feed. The dynamically reconfigurable nature of today’s agile networks enables lower operating costs and other
competitive advantages, allowing service providers to use and scale network capacity more flexibly, streamline service provisioning, accelerate rerouting around
points of failure and modify network topology through simple point-and-click network management systems.
We are a leading provider of optical products which are well positioned to meet these demands. Our innovation has resulted in products that have more
functionality, are smaller, require less power and are more cost-effective, particularly in the area of photonic integrated circuits, which can replace many discrete
components with a single photonic chip. For example, the tunable 10-gigabit small form-factor pluggable transceiver we pioneered with its tunable photonic chip is
85% smaller than previous tunable models. We also developed the industry’s first tunable small form-factor pluggable transceiver for enterprise and metro
networks. Higher levels of integration have also led to development of the Super Transport Blade, which delivers all transport functions (wavelength switching,
pre-amplification, post-amplification, optical supervisory channel and monitoring) in a single, integrated platform, essentially replacing three blades with one.
Strategy
In our OpComms segment, we are focused on technology leadership through collaborative innovation with our customers, cost leadership and functional
integration. We will continue to align the latest technologies with industry leading, scalable manufacturing and operations to drive the next phase of optical
communications for Telecom and Datacom applications that are faster, more agile and more reliable, making us a valuable business and technology partner for
NEMs, cloud service providers and data center operators.
Competition
We compete against various public and private companies in the markets we serve. Publicly traded companies providing optical communications components
include Finisar Corporation, Fujitsu Optical Components, Furukawa Electric Co., Ltd., Neophotonics Corporation, Oclaro, Inc. and Sumitomo Electric Industries,
Ltd.
Offerings
Our OpComms offerings address the following markets: Telecom, Datacom and Consumer and Industrial. In addition to a full selection of active and passive
components, we offer increasing levels of functionality and integration in modules, circuit packs and subsystems for transmission, amplification, wavelength
management and more.
In the Telecom market, we provide transmission and transport solutions for optical networks that make up the backbone of the wireline Telecom
infrastructure, thereby enabling the internet. Transmission products, such as our tunable transponder, transceiver and transmitter modules, transmit and receive
high-speed data signals at the ingress/egress points of the network. These products use dense wavelength division multiplexing technology to enable high capacity
(up to 10Tb/s) links driven by insatiable internet demand. We also offer components including tunable lasers, receivers and modulators to address the higher end of
these same network applications.
Our transport products, such as ROADMs, amplifiers and Optical Channel Monitors provide switching, routing and conditioning of signals. We also provide
components for transport, including passive components such as our attenuators, circulators, couplers/splitters/WDMs, gain flattening filters, hybrid interleavers,
multiplexer/demultiplexers polarization components, switches and wavelength lockers.
Our innovation led to the Super Transport Blade, which integrates all major optical transport functions into a single-slot blade. This all-in-one solution
reduces the size, cost and power requirements of optical components, incorporates nano wavelength selective switch technology and enables greater chassis density
and a smaller footprint.
In the Datacom market, which relies on storing, moving and manipulating vast amounts of data, we offer transmission products, such as our optical
transceivers for Fibre Channel and Ethernet applications. Our transceivers are also used to connect servers, switches, routers and other information technology
infrastructure critical for today’s email, enterprise resource planning and other cloud services such as streaming of high definition video.
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Our integrated fiber optic transceivers provide cost effective and scalable connectivity and are used in the hardware which runs many of the applications
people use daily such as email, social networking, cloud storage, online gaming and streaming video. They are available in several hot-pluggable form factors and
allow for very compact, high-density hardware designs.
For high data transfer rates of 10G, 40G and 100G, we offer several technologies to balance technical and commercial requirements. For high volume, short
distance applications we developed our vertical-cavity surface-emitting lasers. Vertical-cavity surface-emitting lasers are ideal for short reaches because they are
low power consumption, low cost and highly scalable. For high-performance, long distance applications we have our distributed feedback laser and electro-
absorption modulated laser. Our individual lasers and compact laser arrays offer an innovative solution for the LANs, SANs, broadband Internet and metro-area
network applications.
3-D sensing provides real time depth information to any photo or video image. This represents a fundamental transition for image capture akin to the
transition from monochrome to color and gives devices the ability to see the world around them in three dimensions. The immediate applications include full body
imaging for gaming, 3-D scanning for space mapping and facial recognition for security. Emerging applications are in-cabin tracking in cars, self-navigating
robotics and drones in industrial applications and 3-D capture of objects coupled with 3-D printing. 3-D sensing can be applied to any device with a camera. The
technologies to achieve accurate and stable 3-D sensing converged to laser based solutions. We are the leading supplier of the critical laser illumination sources for
3-D sensing systems being used in applications for gaming, computing and home entertainment.
Lasers
We develop lasers employed in a variety of OEM applications. Our Lasers products serve customers in markets and applications such as manufacturing,
biotechnology, graphics and imaging, remote sensing and precision machining such as drilling in printed circuit boards, wafer singulation and solar cell scribing.
These products include diode, direct-diode, diode-pumped solid-state, fiber and gas lasers.
In addition, our photonic power products include fiber optic-based systems for delivering and measuring electrical power.
Markets
Our portfolio of laser products includes components and subsystems used in a variety of OEM applications that range in output power from milliwatts to
kilowatts and include ultraviolet, visible and infrared wavelengths. We support customer applications in the biotechnology, graphics and imaging, remote sensing,
materials processing and other precision machining areas.
Customers
Our Lasers customers include Amada Co., Ltd., ASML Holding N.V., Beckman Coulter, Inc., Becton, Dickinson and Company, DISCO Corporation, Electro
Scientific Industries, Inc., EO Technics Co., Ltd. and KLA-Tencor Corporation. During fiscal 2015, 2014 and 2013, we did not have any single customer
attributable to our Lasers segment that generated net revenue greater than 10% of our total net revenue.
Trends
As technology advances, industries increasingly turn to lasers when they need more precision, higher productivity and energy efficient, or “green,”
alternatives for problems that cannot be solved by mechanical, electronic or other means. For example, industries are using lasers to develop products that are
smaller and lighter to increase productivity and yield and to lower their energy consumption. Lasers have been used for years to help achieve the scale and
precision needed in semiconductor processing. In biotech applications, lasers have been instrumental for advances (and new standard procedures) in cytology,
hematology, genome sequencing and crime scene investigations, among others. We believe the long-term trends in these industries will likely lead to increased
demand for lasers.
In addition, demand continues for electronic products, as well as products and components in other industries, to offer greater functionality while becoming
smaller, lighter and less expensive. Product designs that achieve this are requiring precise micromachining and materials processing, such as micro bending,
soldering and welding. At the scale and processing speed needed, lasers are replacing mature mechanical tools such as drills for minute holes, or “vias,” in printed
circuit boards and saws and scribes for singulating silicon wafers, resulting in greater precision and productivity. As these trends continue, we
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believe that manufacturers and other industries will increase their reliance on lasers in order to maintain or increase their competitiveness.
We believe we are well-positioned with key OEM providers of laser solutions to these industries. We continue to develop our laser portfolio to offer smaller
and more cost-effective products designed specifically for the performance, integration, reliability and support needs of our OEM customers.
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Strategy
In our Lasers segment, we leverage our long-term relationships with OEM customers to drive commercial laser innovation. Using established manufacturing,
engineering, lasers and photonics expertise, we deliver products that meet cost-of-ownership and reliability needs while delivering on volume production demands.
Competition
We compete against various public and private companies in the commercial laser markets we serve. Publicly traded companies providing commercial laser
products include IPG Photonics Corporation, Coherent, Inc., Rofin-Sinar Technologies Inc. and Newport Corporation.
Offerings
Our broad range of Lasers products includes diode-pumped solid-state, fiber, diode, direct-diode and gas lasers such as argon-ion and helium-neon lasers.
Diode-pumped solid-state and fiber lasers that provide excellent beam quality, low noise and exceptional reliability are used in biotechnology, graphics and
imaging, remote sensing, materials processing and precision machining applications. Diode and direct-diode lasers address a wide variety of applications, including
laser pumping, thermal exposure, illumination, ophthalmology, image recording, printing, plastic welding and selective soldering. Gas lasers such as argon-ion and
helium-neon lasers provide a stable, low-cost and reliable solution over a wide range of operating conditions, making them well suited for complex, high-resolution
OEM applications such as flow cytometry, DNA sequencing, graphics and imaging and semiconductor inspection.
Acquisitions
We are committed to the ongoing evaluation of strategic opportunities and, where appropriate, the acquisition of additional products, technologies or
businesses that are complementary to, or broaden the markets for, our products. We believe we have strengthened our business model by expanding our
addressable markets, customer base and expertise, diversifying our product portfolio and fortifying our core businesses through acquisitions as well as through
organic initiatives.
On January 27, 2014 ("Time-Bandwidth Closing Date"), Viavi completed the acquisition of Time-Bandwidth Products Inc. ("Time-Bandwidth"), a privately-
held provider of high powered and ultrafast lasers for industrial and scientific markets. Use of ultrafast lasers for micromachining applications is being driven
primarily by the increasing use of consumer electronics and connected devices globally. Manufacturers are taking advantage of high-power and ultrafast lasers to
create quality micro parts for consumer electronics and to process semiconductor chips for consumer devices. Viavi acquired all outstanding shares of Time-
Bandwidth for a total purchase price of $15.0 million in cash, including a holdback amount of approximately $2.3 million which had been withheld to satisfy
potential indemnification claims by Viavi in relation to the Time-Bandwidth acquisition. In connection with the Separation, we succeeded to the assets and
liabilities associated with the Time-Bandwidth business. During the first quarter of fiscal 2016, we released the holdback amount of $2.3 million following the
eighteen-month anniversary of the Time-Bandwidth Closing Date.
Please refer to “ Note 6. Mergers and Acquisitions ” to the audited annual combined financial statements for further information.
Restructuring Programs
We continue to engage in targeted restructuring plans primarily intended to reduce costs, consolidate our operations, rationalize the manufacturing of our
products and align our business in response to market needs. We have focused on consolidating product manufacturing, while taking into consideration our current
investment strategy, product offerings, core competencies, opportunities to enhance cost efficiency and the availability of alternative manufacturers, as appropriate.
Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to the audited annual combined
financial statements for further discussion on these charges.
Research and Development
During fiscal 2015 , 2014 and 2013 , we incurred R&D expenses of $140.8 million , $134.9 million and $113.7 million , respectively. The number of
employees engaged in R&D was approximately 550 as of June 27, 2015 , 570 as of June 28, 2014 and 510 as of June 29, 2013 .
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We devote substantial resources to R&D to develop new and enhanced products to serve our markets. Once the design of a product is complete, our
engineering efforts shift to enhancing both product performance and our ability to manufacture it in greater volume and at lower cost.
In our OpComms segment, we are increasing our focus on the most promising markets while maintaining our capability to provide products throughout the
network. We are increasing our emphasis on Datacom products, such as 40G and 100G transceivers while we continue to maintain strong investments in Telecom
components and modules such as ROADMs and tunable devices needed for long-haul and metro markets. We are also responding to our customers’ requests for
higher levels of integration, including the integration of optics, electronics and software in our modules, subsystems and circuit packs. We are providing optical
technology for 3-D sensing systems that enable the control of technology by natural body gestures instead of using a remote, mouse or other device. Emerging 3-D
sensing systems simplify the way that people interact with technology and are initially being used in applications for gaming platforms, computing and home
entertainment.
In our Lasers segment, we continue to develop new product offerings in both solid-state and fiber lasers that take advantage of technologies and components
we develop. All these developments are targeted at serving customers engaging in biotechnology, graphics and imaging, remote sensing, and materials processing
and precision micromachining markets.
Manufacturing
Our significant manufacturing facilities are located in the United States and Switzerland, while our significant contract manufacturing partners are located in
China, Taiwan and Thailand.
Sources and Availability of Raw Materials
We use various suppliers and contract manufacturers to supply parts and components for the manufacture and support of multiple product lines. Although our
intention is to establish at least two sources of supply for materials whenever possible, for certain components we have sole or limited source supply arrangements.
We may not be able to procure these components from alternative sources at acceptable prices and quality within a reasonable time, or at all; therefore, the risk of
loss or interruption of such arrangements could impact our ability to deliver certain products on a timely basis.
Intellectual Property
Intellectual property rights that apply to our various products include patents, trade secrets and trademarks. We do not intend to broadly license our
intellectual property rights unless we can obtain adequate consideration or enter into acceptable patent cross-license agreements. We own approximately 760 U.S.
patents and approximately 275 foreign patents, and have approximately 140 patent applications pending throughout the world.
Backlog
Backlog consists of purchase orders for products for which we have assigned shipment dates.
As of June 27, 2015 , our backlog was approximately $135 million, as compared to approximately $138 million as of June 28, 2014 . Due to possible changes
in product delivery schedules and cancellation of product orders, and because our sales often reflect orders shipped in the same quarter in which they are received,
our backlog at any particular date is not necessarily indicative of actual revenue or the level of orders for any succeeding period.
Employees
As of June 27, 2015 , we employed approximately 1,550 full-time employees including approximately 850 employees in manufacturing, 550 employees in
R&D and 150 employees in SG&A. After the Separation, approximately 150 additional Viavi corporate and shared services employees were transferred to our
business.
Outside of the United States, our business is subject to labor laws that differ from those in the United States. We follow the statutory requirements of those
countries where we operate. We consider our employee relations to be good.
Environmental
Our 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
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subject to regulation 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.
In connection with the Separation, we agreed to indemnify Viavi for any liability associated with contamination from past operations at all properties
transferred to us from Viavi, to the extent the resulting issues primarily related to our business.
International Operations
During fiscal 2015 , 2014 and 2013 , net revenue from customers outside the United States based on the geographic region and country where our product is
initially shipped, represented 80.6% , 78.3% and 73.8% of net revenue, respectively. In certain circumstances customers may request shipment of our product to a
contract manufacturer in one country, which may differ from the location of their end customers. During fiscal 2015 , our net revenue from Hong Kong, Mexico
and Japan represented 14.4% , 13.5% and 12.7% of our combined net revenue, respectively. During fiscal 2014 , our net revenue from Hong Kong, Mexico and
Japan represented 15.8% , 13.6% and 11.9% of our combined net revenue, respectively. During fiscal 2013 , our net revenue from Hong Kong and Japan
represented 16.4% and 10.2% of our combined net revenue, respectively. Our net revenue is primarily denominated in U.S. dollars, including our net revenue from
customers outside the United States based on customer shipment locations as presented above.
As of June 27, 2015 and June 28, 2014 , long-lived assets, namely our net property, plant and equipment, located outside of the United States comprised
56.0% and 59.0% of our total property, plant and equipment, net, respectively. As of June 27, 2015 , approximately 24.0% and 20.3% of our net property, plant and
equipment were located in China and Thailand, respectively. As of June 28, 2014 , approximately 27.5% and 21.8% of our net property, plant and equipment were
located in China and Thailand, respectively.
Please refer to “ Note 14. Operating Segments and Geographic Information ” to the audited annual combined financial statements for more information. For
information regarding risks associated with our international operations, see “Item 1A. Risk Factors.”
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ITEM 1A. RISK FACTORS
You should carefully consider the following risks and other information in this information statement in evaluating us and our common stock. Any of the
following risks could materially and adversely affect our results of operations or financial condition. The risk factors generally have been separated into three
groups: risks related to our business, risks related to the Separation and risks related to our common stock.
Risks Related to Our Business
Our
operating
results
may
be
adversely
affected
by
unfavorable
economic
and
market
conditions.
Although the global economy has been showing signs of improvement, its uncertain state has contributed and continues to contribute to decreases in demand
and spending in the technology industry at large, as well as to the specific markets in which we operate. The slow pace of global economic recovery and the
resulting effects on global credit markets has created uncertainty in the timing and overall demand from our customers. This uncertainty may lead to greater
revenue fluctuations, increased price competition for our products, and may increase the risk of excess and obsolete inventories and higher overhead costs as a
percentage of revenue. Continued economic challenges in the global financial markets could further negatively impact our operations by affecting the solvency of
our customers, the solvency of our key suppliers or the ability of our customers to obtain credit to finance purchases of our products. If economic conditions do not
improve or if they deteriorate, our financial condition and results of operations would likely be materially and adversely impacted.
Changing
technology
and
intense
competition
require
us
to
continue
to
innovate
while
controlling
product
costs,
and
our
failure
to
do
so
may
result
in
decreased
revenues
and
profitability.
The markets in which we operate are dynamic and complex, and our success depends upon our ability to deliver both our current product offerings and new
products and technologies on time and at acceptable cost to our customers. The markets for our products are characterized by rapid technological change, frequent
new product introductions, substantial capital investment, changes in customer requirements, continued price pressures and a constantly evolving industry. Our
future performance will depend on the successful development, introduction and market acceptance of new and enhanced features and products that address these
issues and provide solutions that meet our customers’ current and future needs.
The market for optical communications products in particular has matured over time and optical communications products have increasingly become subject
to commoditization. Both legacy competitors as well as new entrants, predominantly Asia-based competitors, have intensified market competition in recent years
leading to pricing pressure. To preserve our revenues and product margin structures, we will remain reliant on an integrated customer and market approach that
anticipates end customer needs as Telecom and Datacom requirements evolve. We also must continue to develop more advanced, differentiated products that
command a premium with customers, while conversely continuing to focus on streamlining product costs for legacy established products. However, our
competitors may continue to enter markets or gain or retain market share through aggressive low pricing strategies that may impact the efficacy of our approach.
Additionally, if significant competitors were to merge or consolidate, they may be able to offer a lower cost structure through economies of scale that we may be
unable to match. Although historically we have emphasized a robust program of technical innovation and streamlining manufacturing operations, if we fail to
continue to develop enhanced or new products, or over time are unable to adjust our cost structure to continue to competitively price more mature technologies, our
revenue and profits and results of operations could be materially and adversely affected.
Continued
competition
in
our
markets
may
lead
to
an
accelerated
reduction
in
our
prices,
revenues
and
market
share.
The end markets for optical products have experienced significant industry consolidation during the past few years. As a result, the markets for optical
subsystems and components are highly competitive. Our current competitors include a number of domestic and international companies, many of which have
substantially greater financial, technical, marketing and distribution resources and brand name recognition than we have. These competitors include Coherent, Inc.,
Finisar Corporation, Fujitsu Optical Components, Furukawa Electric Co., Ltd., IPG Photonics Corporation, Neophotonics Corporation, Newport Corporation,
Oclaro, Inc., Rofin-Sinar Technologies Inc. and Sumitomo Electric Industries, Ltd. We may not be able to compete successfully against either current or future
competitors. Increased competition could result in significant price erosion, reduced revenue, lower margins or loss of market share, any of which would
significantly harm our business.
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The
manufacture
of
our
products
may
be
adversely
affected
if
our
contract
manufacturers
and
suppliers
fail
to
meet
our
needs
or
if
we
are
unable
to
manufacture
certain
products
in
our
manufacturing
facilities.
We rely on several independent contract manufacturers to supply us with certain products. For many products, a particular contract manufacturer may be the
sole source of the finished good product. We depend on these manufacturers to meet our production needs and to provide quality products to our customers.
Despite rigorous testing for quality, both by us and our customers, we may receive defective products. We may incur significant costs to correct defective products
which could include lost future sales, as well as potentially cause customer relations problems, litigation and damage to our reputation. Additionally, the ability of
our contract manufacturers to fulfill their obligations may be affected by natural disasters or economic, political or other forces that are beyond our control. Any
such failure could have a material impact on our ability to meet our customers’ expectations and may materially impact our operating results. In addition, some of
our purchase commitments with contract manufacturers are not cancellable which may impact our earnings if customer forecasts driving these purchase
commitments do not materialize and we are unable to sell the products to other customers. Furthermore, it would be costly and require a long period of time to
move products from one contract manufacturer to another and could result in interruptions in supply, which would likely materially impact our financial condition
and results of operations.
We manufacture some of the components that we provide to our contract manufacturers, along with our own finished goods, in our Bloomfield, Connecticut
and San Jose, California manufacturing facilities. For some of the components and finished good products we are the sole manufacturer. Our manufacturing
processes are highly complex and issues are often difficult to detect and correct. From time to time we have experienced problems achieving acceptable yields in
our manufacturing facilities, resulting in delays in the availability of our products. In addition, if we experience problems with our manufacturing facilities, it
would be costly and require a long period of time to move the manufacture of these components and finished good products to a contract manufacturer and could
result in interruptions in supply, which would likely materially impact our financial condition and results of operations.
Changes in manufacturing processes are often required due to changes in product specifications, changing customer needs and the introduction of new
products. These changes may reduce manufacturing yields at our contract manufacturers and at our own manufacturing facilities resulting in reduced margins on
those products.
We
depend
on
a
limited
number
of
suppliers
for
raw
materials,
packages
and
components,
and
any
failure
or
delay
by
these
suppliers
in
meeting
our
requirements
could
have
an
adverse
effect
on
our
business
and
results
of
operations.
We are dependent on a limited number of suppliers, who are often small and specialized, for raw materials, packages and standard components. Our business
and results of operations have been, and could continue to be, adversely affected by this dependency. Specific concerns we periodically encounter with our
suppliers include stoppages or delays of supply, insufficient resources to supply our requirements, substitution of more expensive or less reliable materials, receipt
of defective parts or contaminated materials, increases in the price of supplies, and an inability to obtain reduced pricing from our suppliers in response to
competitive pressures.
We
rely
on
a
limited
number
of
customers
for
a
significant
portion
of
our
sales;
our
business
is
subject
to
seasonality;
and
the
majority
of
our
customers
do
not
have
contractual
purchase
commitments.
We have consistently relied on a small number of customers for a significant portion of our sales and we expect that this customer concentration will continue
in the future. For example, during the fiscal year ended June 27, 2015 , our five largest customers accounted for over 41% of our revenue and the majority of our
customers purchase products under purchase orders or under contracts that do not contain volume purchase commitments. Changes in the business requirements,
vendor selection, project prioritization, financial prospects, capital resources, and expenditures, or purchasing behavior (including product mix purchased) of our
key customers could significantly decrease our sales to such customers or could lead to delays or cancellations of planned purchases of our products or services,
which increases the risk of quarterly fluctuations in our revenues and operating results. In addition, as a result of the seasonality of the business of certain of our
customers, our business and results of operations may fluctuate. If forecasted orders do not materialize, we may need to reduce investment in R&D activities, fail
to optimize our manufacturing capacity, or have excess inventory. Any of these factors could adversely affect our business, financial condition and results of
operations.
We
contract
with
a
number
of
large
OEM
and
end-user
service
providers
that
have
considerable
bargaining
power,
which
may
require
us
to
agree
to
terms
and
conditions
that
could
have
an
adverse
effect
on
our
business
or
ability
to
recognize
revenues.
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Large OEM and end-user service providers comprise a significant portion of our customer base. These customers generally have greater purchasing power
than smaller entities and, accordingly, often request and receive more favorable terms from suppliers. As we seek to expand our sales to existing customers and
acquire new customers, we may be required to agree to terms and conditions that are favorable to our customers and that may affect the timing of our ability to
recognize revenue, increase our costs and have an adverse effect on our business, financial condition, and results of operations. Furthermore, consolidation among
such large customers can further increase their buying power and ability to require onerous terms. Additionally, the terms these large customers require, such as
most-favored nation or exclusivity provisions, may impact our ability to do business with other customers and generate revenues from such customers.
Our
products
may
contain
defects
that
may
cause
us
to
incur
significant
costs,
divert
our
attention
from
product
development
efforts
and
result
in
a
loss
of
customers.
Our products are complex and defects may be found from time to time. Networking products frequently contain undetected software or hardware defects
when first introduced or as new versions are released. In addition, our products are often embedded in or deployed in conjunction with our customers’ products
which incorporate a variety of components produced by third parties. As a result, when problems occur, it may be difficult to identify the source of the problem.
These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product
development efforts and cause significant customer relation problems or loss of customers, all of which would harm our business.
We
are
subject
to
continued
changes
in
tax
laws;
the
possible
fluctuation
of
our
effective
tax
rate
over
time
could
materially
and
adversely
affect
our
operating
results.
We are subject to taxes in the United States and numerous international jurisdictions. We record tax expense based on current tax payments and our estimates
of future tax payments, which may include reserves for estimates of probable settlements of international and domestic tax audits. At any one time, multiple tax
years and jurisdictions are subject to audit by various taxing authorities. The results of these audits and negotiations with taxing authorities may affect the ultimate
settlement of these issues. As a result, there could be ongoing variability in our tax rates as taxable events occur and uncertain tax positions are re-evaluated or
resolved.
Tax policy reform continues to be a topic of discussion in the United States and in the foreign jurisdictions in which we may conduct business. A significant
change to the tax system in the United States or other foreign jurisdictions, including changes to the taxation of international income, could have a material adverse
effect on our results of operations. Our effective tax rate in a given financial statement period may be materially impacted by changes in tax laws, changes in the
mix and level of earnings by taxing jurisdiction, changes to existing accounting rules or regulations or by changes to our ownership or capital structures.
Fluctuations in our tax obligations and effective tax rate could materially and adversely affect our results of business, financial condition and operating results.
We
may
change
our
international
corporate
structure
in
the
near
future
in
order
to
minimize
our
effective
tax
rate;
however,
if
we
are
unable
to
adopt
this
structure
or
if
it
is
challenged
by
U.S.
or
foreign
tax
authorities,
we
may
be
unable
to
realize
such
tax
savings
which
could
materially
and
adversely
affect
our
operating
results.
We have taken certain preliminary steps to implement an international corporate structure more closely aligned with our international operations. This
potential corporate structure may reduce our overall effective tax rate through changes among our wholly-owned subsidiaries in how we use our intellectual
property, and how we structure our international procurement and sales operations. The contemplated structure includes legal entities located in jurisdictions with
income tax rates lower than the U.S. statutory tax rate. Such intercompany arrangements would be designed to result in income earned by such entities in
accordance with arm’s-length principles and commensurate with functions performed, risks assumed and ownership of valuable corporate assets. We believe that
income taxed in certain foreign jurisdictions at a lower rate relative to the U.S. statutory rate will have a beneficial impact on our worldwide effective tax rate over
the medium to long term.
We have agreed to reimburse Viavi for certain tax liabilities and related costs that may be incurred by Viavi, following application of net operating losses by
Viavi, in the event that we implement this revised corporate structure. In addition, the implementation of such a structure has required us to incur expenses, and
may require that we incur additional expenses, for which we may not realize related benefits, and in any event, we do not expect to materially realize such benefits
for several years following the Separation.
If we put the intended structure into effect and it is not accepted by the applicable taxing authorities, if changes in domestic and international tax laws
negatively impact the proposed structure, including proposed legislation to reform U.S.
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taxation of international business activities, or if we do not operate our business consistent with the proposed structure and applicable tax provisions, we may fail to
achieve the financial and operational efficiencies that we anticipate as a result of the proposed structure, and our business, financial condition and operating results
may be materially and adversely affected.
We
are
subject
to
risks
arising
from
our
international
operations,
which
may
adversely
affect
our
business,
financial
condition,
and
results
of
operations.
We derive a majority of our revenues from our international operations, and we plan to continue expanding our business in international markets in the
future. In addition, we have extensive international manufacturing capabilities and facilities, with employees engaged in R&D, administration, manufacturing,
support and sales and marketing activities.
As a result of our international operations, we are affected by economic, business regulatory, social, and political conditions in foreign countries, including
the following:
•
•
•
•
•
•
•
changes in general IT spending,
the imposition of government controls, inclusive of critical infrastructure protection;
changes or limitations in trade protection laws or other regulatory requirements, which may affect our ability to import or export our products from
various countries;
varying and potentially conflicting regulations;
fluctuations in local economies;
wage inflation or a tightening of the labor market; and
the impact of the following on service provider and government spending patterns: political considerations, unfavorable changes in tax treaties or
laws, natural disasters, epidemic disease, labor unrest, earnings expatriation restrictions, misappropriation of intellectual property, military actions,
acts of terrorism, political and social unrest and difficulties in staffing and managing international operations.
Any or all of these factors could have a material adverse impact on our business, financial condition, and results of operations.
Moreover, local laws and customs in many countries differ significantly from or conflict with those in the United States or in other countries in which we
operate. In many foreign countries, particularly in those with developing economies, it is common for others to engage in business practices that are prohibited by
our internal policies and procedures or U.S. regulations applicable to us. There can be no assurance that our employees, contractors, channel partners, and agents
will not take actions in violation of our policies and procedures, which are designed to ensure compliance with U.S. and foreign laws and policies. Violations of
laws or key control policies by our employees, contractors, channel partners, or agents could result in termination of our relationship, financial reporting problems,
fines, and/or penalties for us, or prohibition on the importation or exportation of our products, and could have a material adverse effect on our business, financial
condition and results of operations.
Our
future
operating
results
may
be
subject
to
volatility
due
to
fluctuations
in
foreign
currency.
We are exposed to foreign exchange risks with regard to our operating expenses which may affect our operating results. Although we price our products
primarily in U.S. dollars, a portion of our operating expenses are incurred in foreign currencies. If the value of the U.S. dollar depreciates relative to certain other
foreign currencies, it would increase our costs as expressed in U.S. dollars. Conversely, if the U.S. dollar strengthens relative to other currencies, such
strengthening could raise the relative cost of our products to non-U.S. customers, especially as compared to foreign competitors, and could reduce demand.
We intend to engage in currency hedging transactions to reduce our foreign exchange exposure. However, these transactions may not fully eliminate our risk
and could have an adverse effect on our financial condition.
Our
ability
to
develop,
market,
and
sell
products
could
be
harmed
if
we
are
unable
to
retain
or
hire
key
personnel.
Our future success depends upon our ability to recruit and retain the services of executive, engineering, sales and marketing, and support personnel. The
supply of highly qualified individuals, in particular engineers in very specialized technical areas, or sales people specializing in the service provider and enterprise
markets, is limited and competition for such individuals is intense. None of our officers or key employees is bound by an employment agreement for any specific
term. The loss of the services of any of our key employees, the inability to attract or retain personnel in the future or delays in hiring required personnel, engineers
and sales people, and the complexity and time involved in replacing or training new employees,
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could delay the development and introduction of new products, and negatively impact our ability to market, sell, or support our products.
We
face
a
number
of
risks
related
to
our
strategic
transactions.
We have made acquisitions of other businesses or technologies, including, most recently, Time-Bandwidth in January 2014 and we will continue to review
acquisition opportunities. Such strategic transactions involve numerous risks, including the following:
•
•
•
•
•
•
•
•
•
•
diversion of management’s attention from normal daily operations of the business;
unforeseen expenses, delays or conditions imposed upon the acquisition, including due to required regulatory approvals or consents;
unanticipated changes in the combined business due to potential divestitures or other requirements imposed by antitrust regulators;
the ability to retain and obtain required regulatory approvals, licenses and permits;
difficulties and costs in integrating the operations, technologies, products, IT and other systems, facilities and personnel of the purchased businesses;
potential difficulties in completing projects associated with in-process R&D;
an acquisition may not further our business strategy as we expected or we may overpay for, or otherwise not realize the expected return on, our
investments;
insufficient net revenue to offset increased expenses associated with acquisitions;
potential loss of key employees of the acquired companies; and
difficulty forecasting revenues and margins.
Our
business
and
operations
would
be
adversely
impacted
in
the
event
of
a
failure
of
our
information
technology
infrastructure.
We rely upon the capacity, reliability and security of our information technology infrastructure and our ability to expand and continually update this
infrastructure in response to our changing needs. In some cases, we may rely upon third-party hosting and support services to meet these needs. Any failure to
manage, expand and update our information technology infrastructure, including our Enterprise Resource Planning ("ERP") system and other applications, any
failure in the extension or operation of this infrastructure, or any failure by our hosting and support partners in the performance of their services could materially
and adversely harm our business. Despite our implementation of security measures, our systems are vulnerable to damage from computer viruses, natural disasters,
unauthorized access and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. To the extent that
any disruption or security breach results in a loss or damage to our data or in inappropriate disclosure of confidential information, it could cause significant damage
to our reputation, affect our relationships with our customers, and ultimately harm our business. In addition, we may be required to incur significant costs to protect
against or mitigate damage caused by these disruptions or security breaches in the future.
If
we
have
insufficient
proprietary
rights
or
if
we
fail
to
protect
our
rights,
our
business
would
be
materially
harmed.
We seek to protect our products and product roadmaps in part by developing and/or securing proprietary rights relating to those products, including patents,
trade secrets, know-how and continuing technological innovation. The steps we take to protect our intellectual property may not adequately prevent
misappropriation or ensure that others will not develop competitive technologies or products. Other companies may be investigating or developing technologies
that are similar to our own. It is possible that patents may not be issued from any of our pending applications or those we may file in the future and, if patents are
issued, the claims allowed may not be sufficiently broad to deter or prohibit others from making, using or selling products that are similar to ours. We do not own
patents in every country in which we sell or distribute our products, and thus others may be able to offer identical products in countries where we do not have
intellectual property protections. In addition, the laws of some territories in which our products are or may be developed, manufactured or sold, including Europe,
Asia-Pacific or Latin America, may not protect our products and intellectual property rights to the same extent as the laws of the United States. Any
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patents issued to us may be challenged, invalidated or circumvented. Additionally, we are currently a licensee for a number of third-party technologies including
software and intellectual property rights from academic institutions, our competitors and others, and we are required to pay royalties to these licensors for the use
thereof. In the future, if such licenses are unavailable or if we are unable to obtain such licenses on commercially reasonable terms, we may not be able to rely on
such third-party technologies which could inhibit our development of new products, impede the sale of some of our current products, substantially increase the cost
to provide these products to our customers, and could have a significant adverse impact on our operating results.
We also seek to protect our important trademarks by endeavoring to register them in certain countries. We have not registered our trademarks in every
country in which we sell or distribute our products, and thus others may be able to use the same or confusingly similar marks in countries where we do not have
trademark registrations. We have adopted Lumentum as a new house trademark and trade name for our company, and are in the process of establishing rights in
this name and brand. We have also adopted the Lumentum logo as a new house trademark for our company, and are in the process of establishing rights in this
brand. The new brands are the subject of trademark applications in the United States or other jurisdictions, but the trademarks have not yet proceeded to
registration. The efforts we take to register and protect trademarks, including the new brands, may not be sufficient or effective. Although we will seek to obtain
trademark registrations for the new brands, it is possible we may not be able to protect our new brands through registration in one or more jurisdictions, for
example, the applicable governmental authorities may not approve the registration. Furthermore, even if the applications are approved, third parties may seek to
oppose or otherwise challenge registration. There is the possibility, despite efforts, that the scope of the protection obtained for our trademarks, including the new
brands, will be insufficient or that a registration may be deemed invalid or unenforceable in one or more jurisdictions throughout the world.
Our
products
may
be
subject
to
claims
that
they
infringe
the
intellectual
property
rights
of
others,
the
resolution
of
which
may
be
time-consuming
and
expensive,
as
well
as
require
a
significant
amount
of
resources
to
prosecute,
defend,
or
make
our
products
non-infringing.
Lawsuits and allegations of patent infringement and violation of other intellectual property rights occur in our industry on a regular basis. We have received
in the past, and anticipate that we will receive in the future, notices from third parties claiming that our products infringe upon their proprietary rights, with two
distinct sources becoming increasingly prevalent. First, large technology companies, including some of our customers and competitors, are seeking to monetize
their patent portfolios and have developed large internal organizations that may approach us with demands to enter into license agreements. Second, patent-holding
companies that do not make or sell products (often referred to as “patent trolls”) may claim that our products infringe upon their proprietary rights. We respond to
these claims in the course of our business operations. The litigation or settlement of these matters, regardless of the merit of the claims, could result in significant
expense and divert the efforts of our technical and management personnel, regardless of whether we are successful. If we are unsuccessful, we could be required to
expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation. We may not be
successful in such development, or such licenses may not be available on commercially reasonable terms, or at all. Without such a license, or if we are the subject
of an exclusionary order, our ability to make our products could be limited and we could be enjoined from future sales of the infringing product or products, which
could adversely affect our revenues and operating results. Additionally, we often indemnify our customers against claims of infringement related to our products
and may incur significant expenses to defend against such claims. If we are unsuccessful defending against such claims, we may be required to indemnify our
customers against any damages awarded.
We also face risks that third parties may assert trademark infringement claims against us in one or more jurisdictions throughout the world related to the new
brand and/or other trademarks. The litigation or settlement of these matters, regardless of the merit of the claims, could result in significant expense and divert the
efforts of our technical and management personnel, regardless of whether we are successful. If we are unsuccessful, trademark infringement claims against us
could result in significant monetary liability or prevent us from selling some or all of our products or services under the challenged trademark. In addition,
resolution of claims may require us to alter our products, labels or packaging, license rights from third parties, or cease using the challenged trademark altogether,
which could adversely affect our revenues and operating results.
We
face
certain
litigation
risks
that
could
harm
our
business.
From time to time we have been, and in the future we may become, subject to various legal proceedings and claims that arise in or outside the ordinary
course of business. The results of legal proceedings are difficult to predict. Moreover, many of the complaints filed against us may not specify the amount of
damages that plaintiffs seek, and we therefore may be unable to estimate the possible range of damages that might be incurred should these lawsuits be resolved
against us. While we may be unable to estimate the potential damages arising from such lawsuits, certain of them assert types of claims that, if resolved
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against us, could give rise to substantial damages. Thus, an unfavorable outcome or settlement of one or more of these lawsuits could have a material adverse effect
on our financial condition, liquidity and results of operations. Even if these lawsuits are not resolved against us, the uncertainty and expense associated with
unresolved lawsuits could seriously harm our business, financial condition and reputation. Litigation is costly, time-consuming and disruptive to normal business
operations. The costs of defending these lawsuits have been significant in the past, will continue to be costly and may not be covered by our insurance policies. The
defense of these lawsuits could also result in continued diversion of our management’s time and attention away from business operations, which could harm our
business. For additional discussion regarding litigation, see “Item 3. Legal Proceedings.”
Our
products
incorporate
and
rely
upon
licensed
third-party
technology,
and
if
licenses
of
third-party
technology
do
not
continue
to
be
available
to
us
or
are
not
available
on
terms
acceptable
to
us,
our
revenues
and
ability
to
develop
and
introduce
new
products
could
be
adversely
affected.
We integrate licensed third-party technology into certain of our products. From time to time, we may be required to license additional technology from third-
parties to develop new products or product enhancements. Third-party licenses may not be available or continue to be available to us on commercially reasonable
terms. The failure to comply with the terms of any license, including free open source software, may result in our inability to continue to use such license. Our
inability to maintain or re-license any third-party licenses required in our products or our inability to obtain third-party licenses necessary to develop new products
and product enhancements, could require us, if possible, to develop substitute technology or obtain substitute technology of lower quality or performance standards
or at a greater cost, any of which could delay or prevent product shipment and harm our business, financial condition, and results of operations.
Environmental
and
other
regulations
could
increase
our
expenses
and
harm
our
operating
results.
Our manufacturing operations and our products are subject to various federal, state and foreign laws and regulations, including those governing pollution and
protection of human health and the environment in each of the jurisdictions in which we operate or sell our products. These laws and regulations govern, among
other things, wastewater discharges and the handling and disposal of hazardous materials in our products. Our failure to comply with current and future
environmental, or health or safety requirements could cause us to incur substantial costs, including significant capital expenditures, to comply with such
environmental laws and regulations and to clean up contaminated properties that we own or operate. Such clean-up or compliance obligations could result in
disruptions to our operations. Additionally, if we are found to be in violation of these laws, we could be subject to governmental fines or civil liability for damages
resulting from such violations. These costs could have a material adverse impact on our financial condition or operating results.
From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and enforced. We continue to
evaluate the necessary steps for compliance with regulations as they are enacted. These regulations include, for example, the Registration, Evaluation,
Authorization and Restriction of Chemicals (“REACH”), the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment
Directive (“RoHS”) and the Waste Electrical and Electronic Equipment Directive (“WEEE”) enacted in the European Union which regulate the use of certain
hazardous substances in, and require the collection, reuse and recycling of waste from, certain products we manufacture. This and similar legislation may require
us to re-design our products to ensure compliance with the applicable standards, for example by requiring the use of different types of materials, which could have
an adverse impact on the performance of our products, add greater testing lead-times for product introductions or other similar effects. We believe we comply with
all such legislation where our products are sold and we will continue to monitor these laws and the regulations being adopted under them to determine our
responsibilities. In addition, the SEC has promulgated rules requiring disclosure regarding the use of certain “conflict minerals” mined from the Democratic
Republic of Congo and adjoining countries and procedures regarding a manufacturer's efforts to prevent the sourcing of such minerals. The implementation of such
rules has required us to incur additional expenses and internal resources and may continue to do so in the future. Our failure to comply with any of the foregoing
regulatory requirements could result in increased costs for our products, monetary penalties, damages to our reputation and legal action.
We will need to ensure that we comply with such laws and regulations as they are enacted. Additionally, we may be required to ensure that our suppliers
comply with such laws and regulations. If we or our suppliers fail to comply with such laws, we could face sanctions for such noncompliance, and our customers
may refuse to purchase our products, which would have a material adverse effect on our business, financial condition and results of operations.
We
are
subject
to
provisions
of
the
Dodd-Frank
Wall
Street
Reform
and
Consumer
Protection
Act
regarding
“conflict”
minerals
that
could
subject
us
to
additional
costs
and
liabilities.
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Table of Contents
We are subject to the SEC rules implementing the requirements of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act which
establish disclosure and reporting requirements for companies who use “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries
in their products. Complying with the disclosure requirements involves substantial diligence efforts to determine the source of any conflict minerals used in our
products and may require third-party auditing of our diligence process. These efforts may demand internal resources that would otherwise be directed towards
operational activities.
Since our supply chain is complex, we may face reputational challenges if we are unable to sufficiently verify the origins of the conflict minerals used in our
products. Additionally, if we are unable to satisfy those customers who require that all of the components of our products are determined to be conflict free, they
may choose a competitor’s products which could materially impact our financial condition and operating results.
We
will
lose
sales
if
we
are
unable
to
obtain
government
authorization
to
export
certain
of
our
products,
and
we
would
be
subject
to
legal
and
regulatory
consequences
if
we
do
not
comply
with
applicable
export
control
laws
and
regulations.
Exports of certain of our products are subject to export controls imposed by the U.S. Government and administered by the United States Departments of State
and Commerce. In certain instances, these regulations may require pre-shipment authorization from the administering department. For products subject to the
Export Administration Regulations, or EAR, administered by the Department of Commerce's Bureau of Industry and Security, the requirement for a license is
dependent on the type and end use of the product, the final destination, the identity of the end user and whether a license exception might apply. Virtually all
exports of products subject to the International Traffic in Arms Regulations, or ITAR, administered by the Department of State's Directorate of Defense Trade
Controls, require a license. Certain of our fiber optics products are subject to EAR and certain of our RF-over-fiber products, as well as certain products developed
with government funding, are currently subject to ITAR. Products developed and manufactured in our foreign locations are subject to export controls of the
applicable foreign nation.
Given the current global political climate, obtaining export licenses can be difficult and time-consuming. Failure to obtain export licenses for these shipments
could significantly reduce our revenue and materially adversely affect our business, financial condition and results of operations. Compliance with U.S.
Government regulations also subjects us to additional fees and costs. The absence of comparable restrictions on competitors in other countries may adversely affect
our competitive position.
Risks Related to the Separation and Our Operation as an Independent Public Company
We
have
a
limited
history
of
operating
as
an
independent
company,
and
our
pre-separation
financial
information
is
not
necessarily
representative
of
the
results
that
we
would
have
achieved
as
a
separate,
publicly
traded
company
and
may
not
be
a
reliable
indicator
of
our
future
results.
The historical information in this Annual Report on Form 10-K refers to our business as operated by and integrated with Viavi. Our historical financial
information included in this Annual Report on Form 10-K is derived from the consolidated financial statements and accounting records of Viavi. Accordingly, the
historical financial information included in this Annual Report on Form 10-K does not necessarily reflect the financial condition, results of operations or cash flows
that we would have achieved as a separate, publicly traded company during the periods presented or those that we will achieve in the future primarily as a result of
the factors described below.
•
•
•
Prior to the Separation, our business was operated by Viavi as part of its broader corporate organization, rather than as an independent company. Viavi or
one of its affiliates performed various corporate functions for our business such as legal, treasury, accounting, auditing, human resources, finance and
other corporate functions. Our historical financial results reflect allocations of corporate expenses from Viavi that may differ from our actual operating
expenses for these functions in the future. Therefore, our cost related to such functions previously performed by Viavi may increase following the
Separation.
Our business was integrated with the other businesses of Viavi. Historically, we shared economies of scale in costs, employees, vendor and customer
relationships. We will need to enter into new arrangements with certain vendors which may result in us paying higher charges than in the past for these
services. This could have an adverse effect on our results of operations and financial condition.
Our working capital requirements and capital for general corporate purposes, including acquisitions and capital expenditures, were historically satisfied as
part of the corporate-wide cash management policies of Viavi. Following the Separation, we may need to obtain additional financing from banks, through
public offerings or private placements of debt or equity securities, strategic relationships or other arrangements.
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Table of Contents
•
After the completion of the Separation, the cost of capital for our business may be higher than Viavi’s cost of capital prior to the Separation.
Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a company separate
from Viavi. For additional information about the past financial performance of our business and the basis of presentation of the historical combined financial
statements, see “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
the historical financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K.
Certain
contracts
that
will
need
to
be
transferred
or
assigned
to
us
from
Viavi
or
its
affiliates
in
connection
with
the
Separation
require
the
consent
of
the
counterparty
to
such
an
assignment,
and
failure
to
obtain
these
consents
could
increase
our
expenses
or
otherwise
reduce
our
profitability.
The separation agreement provides that, in connection with the Separation, a number of contracts were transferred or assigned from Viavi or its affiliates to
us or our affiliates. Many of these contracts require the contractual counterparty’s consent to such an assignment. Similarly, in some circumstances, we are a joint
beneficiary of contracts, and we need to enter into a new agreement with the third party to replicate the contract or assign the portion of the contract related to our
business. It is possible that some parties may use the requirement of a consent or the fact that the Separation has occurred to seek more favorable contractual terms
from us or to seek to terminate the contract. If (i) we are unable to obtain these consents for certain key contracts on commercially and satisfactory terms, (ii) we
enter into new agreements on significantly less favorable terms, or (iii) the contracts are terminated, we may be unable to obtain some of the benefits, assets and
contractual commitments that are intended to be allocated to us as part of the Separation. Additionally, the loss of these contracts could increase our expenses or
otherwise reduce our profitability.
Potential
indemnification
liabilities
to
Viavi
pursuant
to
the
separation
agreement
could
materially
and
adversely
affect
our
business,
financial
condition,
results
of
operations
and
cash
flows.
The separation agreement provides for, among other things, indemnification obligations designed to make us financially responsible for:
•
•
•
•
•
any Lumentum Liabilities (as defined in the Separation and Distribution Agreement dated as of July 31, 2015 by and among JDS Uniphase Corporation,
Lumentum Holdings Inc. and Lumentum Operations LLC (the "separation agreement"));
our failure to pay, perform or otherwise promptly discharge any Lumentum Liabilities or contracts, in accordance with their respective terms, whether
prior to, at or after the distribution;
any guarantee, indemnification obligation, surety bond or other credit support agreement, arrangement, commitment or understanding by Viavi for our
benefit, unless related to a JDSU Liability (as defined in the separation agreement);
any breach by us of the separation agreement or any of the ancillary agreements or any action by us in contravention of our amended and restated
certificate of incorporation or amended and restated bylaws; and
any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, with respect to all information contained in the registration statement and information statement
filed in connection with the Separation or any other disclosure document that describes the Separation or the distribution, or us and our subsidiaries, or
primarily relates to the transactions contemplated by the separation agreement, subject to certain exceptions.
Our indemnification obligations are not subject to maximum loss clauses. If we are required to indemnify Viavi under the circumstances set forth in the
separation agreement, we may be subject to substantial liabilities.
In
connection
with
the
Separation,
Viavi
will
indemnify
us
for
certain
liabilities.
However,
there
can
be
no
assurance
that
the
indemnity
will
be
sufficient
to
insure
us
against
the
full
amount
of
such
liabilities,
or
that
Viavi’s
ability
to
satisfy
its
indemnification
obligation
will
not
be
impaired
in
the
future.
Pursuant to the separation agreement, Viavi will indemnify us for certain liabilities relating to, arising out of or resulting from:
•
the JDSU Liabilities;
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•
•
•
•
the failure of Viavi or any of its subsidiaries, other than us, to pay, perform or otherwise promptly discharge any of the JDSU Liabilities, in accordance
with their respective terms, whether prior to or after the effective time of the distribution;
any guarantee, indemnification obligation, surety bond or other credit support agreement, arrangement, commitment or understanding by us for the benefit
of Viavi, unless related to a Lumentum Liability;
any breach by Viavi or any of its subsidiaries, other than us, of the separation agreement or any of the ancillary agreements; and
any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, with respect to information contained in the registration statement or information statement filed
in connection with the separation or any other disclosure document that describes the separation or the distribution or primarily relates to the transactions
contemplated by the separation agreement, subject to certain exceptions.
However, third parties could seek to hold us responsible for any of the liabilities that Viavi agrees to retain, and there can be no assurance that the indemnity
from Viavi will be sufficient to protect us against the full amount of such liabilities, or that Viavi will be able to fully satisfy its indemnification obligations.
Moreover, even if we ultimately succeed in recovering from Viavi any amounts for which we are held liable, we may be temporarily required to bear these losses.
We
have
sought
to
characterize
Viavi’s
contribution
of
the
CCOP
business
to
us
as
a
taxable
transaction.
If
tax
authorities
were
to
take
the
position
that
this
contribution
is
not
a
taxable
transaction,
then
we
may
face
greater
than
expected
income
tax
liabilities,
which
would
negatively
impact
our
operating
results.
In connection with the Separation, Viavi’s CCOP business assets were transferred to us in a transaction or transactions intended to be characterized as
taxable, which will result in our receiving a fair market value or substantially stepped-up tax basis in the assets. We expect to reduce our cash taxes by depreciation
and amortization deductions related to the stepped-up tax basis in the assets. If the IRS or foreign tax authorities disagree with our characterization of the
transactions pursuant to which the CCOP business assets will be transferred to us or disallow the depreciation and amortization deductions, and the position were
sustained, our financial results would be materially and adversely affected.
We
could
have
an
indemnification
obligation
to
Viavi
if
the
distribution
were
determined
not
to
qualify
for
non-recognition
treatment,
which
could
materially
and
adversely
affect
our
financial
condition.
We have received a private letter ruling from the IRS, to the effect that the retention by Viavi of 19.9 percent of our common stock will not be deemed to be
pursuant to a plan having as one of its principal purposes the avoidance of U.S. federal income tax within the meaning of Section 355(a)(1)(D)(ii) of the Code.
Notwithstanding the IRS Ruling, the IRS could determine on audit that the retention of our common stock was pursuant to a plan having as one of its principal
purposes the avoidance of U.S. federal income tax if it determines that any of the facts, assumptions, representations or undertakings that we or Viavi have made or
provided to the IRS are not correct. If the retention is deemed to be pursuant to a plan having as one of its principal purposes the avoidance of U.S. federal income
tax, then the distribution could ultimately be determined to be taxable. In addition, Viavi also received a written opinion of PwC, its tax advisor, to the effect that
the distribution, together with certain related transactions necessary to effectuate the distribution, should qualify for non-recognition of gain or loss under
Sections 368(a)(1)(D) and 355 of the Code. The opinion is not binding on the IRS or the courts, and there can be no assurance that the IRS or any court will not
take a contrary position. If the distribution were determined not to qualify for non-recognition of gain and loss, then Viavi would recognize gain in an amount up to
the fair market value of our common stock held by it immediately before the distribution, over its tax basis in our stock immediately before the distribution.
If, due to any of our representations being untrue or our covenants being breached, it were determined that the distribution did not qualify for non-recognition
of gain or loss under Section 355 of the Code, we could be required to indemnify Viavi for the resulting taxes and related expenses. The indemnification obligation
is not expected to be material because Viavi is expected to have a fair market value or substantially stepped-up tax basis in our shares immediately prior to the
Separation. If, contrary to our expectation, it were determined that Viavi did not have a fair market value or substantially stepped-up tax basis in our shares, any
such indemnification obligation could materially and adversely affect our financial condition.
In addition, Section 355(e) of the Code generally creates a presumption that the distribution would be taxable to Viavi, but not to stockholders, if we or our
stockholders were to engage in transactions that result in a 50% or greater change by vote or value in the ownership of our stock during the four-year period
beginning on the date that begins two years before the date of
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the distribution, unless it were established that such transactions and the distribution were not part of a plan or series of related transactions giving effect to such a
change in ownership. If the distribution were taxable to Viavi due to such a 50% or greater change in ownership of our stock, Viavi would recognize gain in an
amount equal to the excess of the fair market value of our common stock held by it immediately before the distribution over its tax basis in such stock, and we
generally would be required to indemnify Viavi for the tax on such gain and related expenses. The indemnification obligation is not expected to be material
because Viavi is expected to have a fair market value or substantially stepped-up tax basis in our shares immediately prior to the Separation. If, contrary to our
expectation, it were determined that Viavi did not have a fair market value or substantially stepped-up tax basis in our shares, any such indemnification obligation
could materially adversely affect our financial condition.
We
have
agreed
to
restrictions
to
preserve
the
non-recognition
treatment
of
the
distribution,
which
may
reduce
our
strategic
and
operating
flexibility.
We have entered into a tax matters agreement under which we will be subject to certain covenants and indemnification obligations that address compliance
with Section 355(e) of the Code. These covenants and indemnification obligations may limit our ability to pursue strategic transactions or engage in new
businesses or other transactions that may maximize the value of our business, and might discourage or delay a strategic transaction that our stockholders may
consider favorable.
We
may
not
achieve
any
or
all
of
the
expected
benefits
of
the
Separation,
and
the
Separation
may
adversely
affect
our
business.
We may not be able to achieve the full strategic and financial benefits expected to result from the Separation, or such benefits may be delayed or not occur at
all. The Separation and distribution is expected to provide us with the following benefits, among others:
• more effective pursuit of our distinct operating priorities and strategies;
•
a distinct investment identity allowing investors to evaluate the merits, performance and future prospects of our business separately from Viavi;
• more efficient allocation of our capital;
•
•
direct access to the capital markets; and
a favorable cash effective tax rate for a number of years.
We may not achieve these and other anticipated benefits for a variety of reasons, including, among others: (i) following the Separation, we may be more
susceptible to market fluctuations and other adverse events than if we were still a part of Viavi; (ii) following the Separation, our business is less diversified and
have less scale than Viavi’s business prior to the Separation; and (iii) the other actions required in connection with the Separation of Viavi’s and our respective
businesses could disrupt our operations. If we fail to achieve any or all of the benefits expected to result from the Separation, or if such benefits are delayed, our
business, operating results and financial condition could be adversely affected.
The
Separation
may
expose
us
to
potential
liabilities
and
business
complications
arising
out
of
state
and
federal
fraudulent
conveyance
laws
and
legal
dividend
requirements.
The Separation could be challenged under various state and federal fraudulent conveyance laws. An unpaid creditor or an entity vested with the power of
such creditor in either Viavi or us (such as a trustee or debtor-in-possession in a bankruptcy) could claim that the Separation left either Viavi or us insolvent or with
unreasonably small capital. In addition, parties could allege that Viavi intended or believed that either Viavi or we would incur debts beyond its or our respective
ability to pay such debts as they mature, or that Viavi or we did not receive fair consideration or reasonably equivalent value in the Separation. If a court were to
agree with such a plaintiff, then such court could void the Separation as a fraudulent transfer and could impose a number of different remedies, including without
limitation:
•
•
•
returning our assets or your shares in our company to Viavi;
forcing Viavi to further capitalize us, although there is no assurance Viavi would have the financial ability to do so if such a judgment were rendered;
voiding our liens and claims against Viavi; or
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•
providing Viavi with a claim for money damages against us in an amount equal to the difference between the consideration received by Viavi and the fair
market value of our company at the time of the Separation.
The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which jurisdiction’s law is applied. Generally, however,
an entity would be considered insolvent if either the fair saleable value of its assets is less than the amount of its liabilities (including the probable amount of
contingent liabilities), or it is unlikely to be able to pay its liabilities as they become due. We cannot assure you as to what standard a court would apply to
determine insolvency or that a court would determine that Viavi or we were solvent at the time of or after giving effect to the Separation, including the distribution
of our common stock.
The distribution of our common stock by Viavi is also subject to review under state corporate distribution statutes. Under the DGCL, a corporation may only
pay dividends to its stockholders either (1) out of its surplus (net assets minus capital) or (2) if there is no such surplus, out of its net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year. Although we believe that Viavi made the distribution of our common stock entirely from surplus,
we cannot assure you that a court will not later determine that some or all of the distribution to Viavi stockholders was unlawful.
Any successful claim that Viavi or Lumentum is insufficiently capitalized following the Separation could potentially expose us to material financial
liabilities, unwinding of the transaction and adverse consequences with customers and suppliers related to our perceived inability to timely deliver products and
pay for materials and services.
We
are
an
“emerging
growth
company”
and
cannot
be
certain
if
the
reduced
disclosure
requirements
applicable
to
“emerging
growth
companies”
will
make
our
common
stock
less
attractive
to
investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an “emerging growth company,” we intend to take
advantage of certain exemptions from various reporting requirements that are applicable to other public companies. Among other things, we will not be required to:
•
•
•
•
•
provide an auditor’s attestation report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act;
comply with any new rules that may be adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which
the auditor would be required to provide additional information about the audit and the financial statements of the issuer;
comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise;
provide certain disclosure regarding executive compensation required of larger public companies; or
hold a nonbinding advisory vote on executive compensation and obtain stockholder approval of any golden parachute payments not previously approved.
Accordingly, the information that we provide stockholders in this Annual Report on Form 10-K and in our other filings with the SEC may be different than
what is available with respect to other public companies. We cannot predict if investors will find our common stock less attractive because we will rely on these
exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price
may be more volatile and adversely affected.
Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)
(B) of the Securities Act of 1933, as amended (“Securities Act”), for complying with new or revised accounting standards. In other words, an “emerging growth
company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to take
advantage of this extended transition period.
We will remain an “emerging growth company” until the earliest of:
the end of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement
filed under the Securities Act;
the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion;
•
•
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•
•
the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period; or
the date on which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act or any successor statute, which would
occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently
completed second fiscal quarter.
Risks Related to Our Common Stock
Our
stock
price
may
be
volatile
and
may
decline
regardless
of
our
operating
performance.
Our common stock is listed on the NASDAQ stock market ("NASDAQ") under the symbol "LITE." The market price of our common stock may fluctuate
significantly due to a number of factors, some of which may be beyond our control, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the sale of our shares by some stockholders after the distribution because our business profile and market capitalization may not fit their investment
objectives;
the sale by Viavi of the retained shares as required by the terms of the IRS ruling;
actual or anticipated fluctuations in our operating results;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
the operating and stock price performance of other comparable companies;
a shift in our investor base;
our quarterly or annual earnings, or those of other companies in our industry;
success or failure of our business strategy;
our ability to obtain financing as needed;
changes to the regulatory and legal environment in which we operate;
announcements by us or our competitors of significant acquisitions or dispositions;
investor perception of us and our industry;
changes in accounting standards, policies, guidance, interpretations or principles;
overall market fluctuations; and
general economic and market conditions and other external factors.
A
number
of
shares
of
our
common
stock
are
or
will
be
eligible
for
future
sale,
including
the
sale
by
Viavi
of
the
shares
of
our
common
stock
that
it
retains
after
the
distribution,
which
could
materially
increase
the
volatility
of
our
stock
price
and
may
cause
our
stock
price
to
decline.
Any sales of substantial amounts of our common stock in the public market or the perception that such sales might occur, in connection with the distribution
or otherwise, may cause the market price of our common stock to decline. Upon completion of the distribution on August 1, 2015, we had an aggregate of
approximately 58.8 million shares of our common stock issued and outstanding. Except for the shares of our common stock retained by Viavi, these shares can be
freely tradable without restriction or registration under the Securities Act, unless the shares are owned by one of our “affiliates,” as that term is defined in Rule 405
under the Securities Act. We are unable to predict whether large amounts of our common stock will be sold in the open market following the distribution. We are
also unable to predict whether a sufficient number of buyers would be in the market at that time.
In addition, following the Separation, Viavi retains an ownership interest in 19.9 percent of our total shares outstanding for a limited period of time. Pursuant
to a stockholder’s and registration rights agreement with Viavi, Viavi will be required to vote such shares in proportion to the votes cast by our other stockholders.
In order to not jeopardize the tax-free status of the distribution, Viavi is required to dispose of such retained shares of our common stock that it owns as soon as
practicable and consistent with its reasons for retaining such shares, but in no event later than three years after the distribution. Pursuant to the stockholder’s and
registration rights agreement, upon the request of Viavi, we will effect the registration under applicable securities laws of the shares of common stock retained by
Viavi. Subject to limited exceptions, we do not have the right to
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prevent or delay the sale of our shares by Viavi pursuant to the stockholder’s and registration right agreement. Any disposition by Viavi, or any significant
stockholder, of our common stock in the public market, or the perception that such dispositions could occur, could materially increase the volatility of our stock
price and adversely affect prevailing market prices for our common stock.
We
cannot
guarantee
the
payment
of
dividends
on
our
common
stock,
or
the
timing
or
amount
of
any
such
dividends.
We do not currently expect to pay dividends on our common stock. The payment of any dividends to our stockholders in the future, and the timing and
amount thereof, will fall within the discretion of our board of directors. Our board of directors’ decisions regarding the payment of dividends will depend on many
factors, such as our financial condition, earnings, capital requirements, potential debt service obligations or restrictive covenants, industry practice, legal
requirements, regulatory constraints and other factors that our board of directors deems relevant.
In addition, because we are a holding company with no material direct operations, we are dependent on loans, dividends and other payments from our
operating subsidiaries to generate the funds necessary to pay dividends on our common stock. However, our operating subsidiaries’ ability to make such
distributions will be subject to their operating results, cash requirements and financial condition and the applicable provisions of Delaware law that may limit the
amount of funds available for distribution. Our ability to pay cash dividends may also be subject to covenants and financial ratios related to existing or future
indebtedness, and other agreements with third parties.
The
obligations
of
Lumentum
Inc.
to
holders
of
its
Series
A
Preferred
Stock
could
have
a
negative
impact
on
holders
of
our
common
stock.
Our subsidiary, Lumentum Inc., issued $35.8 million in Series A Preferred Stock to Viavi, which were sold to Amada following the spin-off. The Series A
Preferred Stock may be converted by Amada into shares of our common stock beginning on the second anniversary of the closing of the stock purchase (absent a
change of control of us or similar event) using a conversion price equal to 125 percent of the volume weighted average price per share of our common stock in the
five “regular-way” trading days following the spin-off. The Series A Preferred Stock may be redeemed by us upon the third anniversary of the date of issuance or
the preferred stockholders may cause us to redeem the Series A Preferred Stock upon the fifth anniversary of the date of issuance.
Cumulative senior dividends on the Series A Preferred Stock will accrue at the annual rate of 2.5 percent, but will be paid only when and if declared by our
board of directors. Our ability to make payments to holders of the Series A Preferred Stock (“Series A Holders”) will depend on Lumentum Inc.’s ability to
generate cash in the future from operations, financings or asset sales. Lumentum Inc.’s ability to generate cash is subject to general economic, financial,
competitive, legislative, regulatory and other factors that we cannot control. The payment of this dividend will reduce the amount of cash otherwise available for
distribution by Lumentum Inc. to us for further distribution to our common stockholders or for other corporate purposes. If Lumentum Inc. is in arrears on the
payment of dividends to the Series A Holders, (i) Lumentum Inc. will not be able to pay any dividends to us, subject to certain exceptions, and (ii) we will not be
able to make any distribution on or repurchase of our common stock.
Certain
provisions
in
our
charter
and
Delaware
corporate
law
could
hinder
a
takeover
attempt.
We are subject to the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”) which prohibits us, under some circumstances, from
engaging in business combinations with some stockholders for a specified period of time without the approval of the holders of substantially all of our outstanding
voting stock. Such provisions could delay or impede the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest
involving us, even if such events could be beneficial, in the short-term, to the interests of the stockholders. In addition, such provisions could limit the price that
some investors might be willing to pay in the future for shares of our common stock. Our certificate of incorporation and bylaws contain provisions providing for
the limitations of liability and indemnification of our directors and officers, allowing vacancies on our board of directors to be filled by the vote of a majority of the
remaining directors, granting our board of directors the authority to establish additional series of preferred stock and to designate the rights, preferences and
privileges of such shares (commonly known as “blank check preferred”) and providing that our stockholders can take action only at a duly called annual or special
meeting of stockholders, which may only be called by the chairman of the board of directors, the chief executive officer or the board of directors. These provisions
may also have the effect of deterring hostile takeovers or delaying changes in control or changes in our management.
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Our
bylaws
designate
Delaware
courts
as
the
sole
and
exclusive
forum
for
certain
types
of
actions
and
proceedings
that
may
be
initiated
by
our
stockholders,
which
could
discourage
lawsuits
against
us
or
our
directors
and
officers.
Our bylaws provide that, unless Lumentum consents in writing to an alternative forum, the state or federal courts of Delaware are the sole and exclusive
forum for any derivative action or proceeding brought on behalf of Lumentum; any action asserting breach of fiduciary duty, or other wrongdoing, by our directors,
officers or other employees to Lumentum or its stockholders; any action asserting a claim against Lumentum pursuant to the Delaware General Corporation Law or
our certificate of incorporation or bylaws; any action asserting a claim against Lumentum governed by the internal affairs doctrine; or any action to interpret,
apply, enforce or determine the validity of our certificate of incorporation or bylaws. This exclusive forum provision may limit the ability of our stockholders to
bring a claim in a judicial forum that such stockholders find favorable for disputes with us or our directors or officers, which may discourage such lawsuits against
us or our directors and officers.
Alternatively, if a court outside of Delaware were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the
specified types of actions or proceedings described above, we may incur additional costs associated with resolving such matters in other jurisdictions, which could
adversely affect our business, financial condition or results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
We own and lease various properties in the United States and in seven other countries around the world. We use the properties for executive and
administrative offices, data centers, product development offices, customer service offices and manufacturing facilities. Our corporate headquarters of
approximately 126,000 square feet is located in Milpitas, California. As of June 27, 2015 , our leased and owned properties in total were approximately 600,000
square feet, of which we owned approximately 81,000 square feet. Larger leased sites include properties located in Canada, China and the United States. We
believe our existing properties, including both owned and leased sites, are in good condition and suitable for the conduct of our business.
From time to time we consider various alternatives related to our long-term facilities needs. While we believe our existing facilities are adequate to meet our
immediate needs, it may become necessary to lease, acquire, or sell additional or alternative space to accommodate future business needs.
ITEM 3. 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 aggregate, will not have a material adverse impact on our financial position, results of operations or statement of
cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an unfavorable final
outcome to occur, there exists the possibility of a material adverse impact on our financial position, results of operations or cash flows for the period in which the
effect becomes reasonably estimable.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market
Information
for
Common
Stock
and
Stockholders
Our common stock is listed on NASDAQ under the symbol “LITE.’’ High and low sales prices per share of our common stock as reported by the NASDAQ
for each full quarterly period of fiscal years 2015 and 2014 are not provided as Lumentum common shares did not begin "regular way" trading on the NASDAQ
until August 4, 2015 . There were 3,221 stockholders of record of Lumentum common stock as of August 22, 2015 . From August 4, 2015 through August 22,
2015 , the highest sales price paid for Lumentum common stock on the NASDAQ was $21.44 per share and the lowest sales price for Lumentum common stock on
the NASDAQ was $18.60 per share.
Dividends
We have not paid any dividends to date, and we currently intend to retain future income to fund the development and growth of our business. We do not
anticipate paying any cash dividends in the foreseeable future.
Recent
Sale
of
Unregistered
Securities
On February 10, 2015, we issued 1,000 shares of our common stock to Viavi pursuant to Section 4(a)(2) of the Securities Act. We did not register the
issuance of the issued shares under the Securities Act because the issuance did not constitute a public offering.
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ITEM 6. SELECTED FINANCIAL DATA
This table sets forth selected financial data of Lumentum ( in millions , except share and per share amounts) for the periods indicated. This data should be
read in conjunction with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of this
Annual Report on Form 10-K and our audited combined financial statements included in Item 8 of this Annual Report on Form 10-K. The selected data in this
section are not intended to replace the audited annual combined financial statements included in this Annual Report on Form 10-K.
Our historical combined financial statements include allocations of expenses arising from shared services and infrastructure provided by Viavi to us,
including costs of information technology, human resources, accounting, legal, real estate and facilities, corporate marketing, insurance, treasury and other
corporate and infrastructure services. These costs may not be representative of the future costs we will incur as an independent public company. In addition, our
historical financial information does not reflect changes that we expect to experience in the future as a result of the Separation from Viavi, including changes in our
cost structure, personnel needs, legal structure, financing and business operations. The financial information included here may not necessarily reflect our financial
position and results of operations or what our financial position and results of operations would have been had we been an independent, publicly-traded company
during the periods presented or be indicative of our future performance as an independent company.
Combined Statement of Operations Data:
Net revenue
Gross Profit
(Loss) income from operations
Net (loss) income
Net (loss) income per share—basic and diluted (3)
Shares used in per share calculation—basic and diluted (3)
June 27, 2015 (2)
June 28, 2014 (1)
June 29, 2013
June 30, 2012
Years Ended
$
$
837.1 $
817.9 $
257.9
(23.4)
(3.4)
(0.06) $
58.8
256.6
8.7
10.7
0.18 $
58.8
769.9 $
222.8
3.9
6.5
0.11 $
58.8
727.9
204.9
(4.5)
2.6
0.04
58.8
Combined Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Other non-current liabilities
Total invested equity
Years Ended
June 27, 2015
June 28, 2014 (1)
June 29, 2013
$
14.5 $
19.9 $
188.7
512.6
9.8
380.7
149.1
492.1
19.6
335.6
7.8
133.4
410.7
17.0
281.8
(1) During the third quarter of fiscal 2014, we acquired Time-Bandwidth in a transaction accounted for in accordance with the authoritative guidance on
business combinations. The Combined Statement of Operations for fiscal 2014 included the results of operations from Time-Bandwidth subsequent to
January 27, 2014 and the Combined Balance Sheet as of June 28, 2014 included Time-Bandwidth's financial position.
(2) During the third quarter of fiscal 2015, we settled an audit in a non-U.S. jurisdiction which resulted in the recognition of a $21.8 million tax benefit. In
addition, we recognized $14.1 million of additional deferred tax assets which were fully offset by a corresponding increase in the deferred tax valuation
allowance.
(3) On August 1, 2015, JDSU distributed 47.1 million shares, or 80.1% of the outstanding shares of Lumentum common stock to existing holders of JDSU
common stock. JDSU was renamed Viavi and at the time of distribution, retained 11.7 million shares, or 19.9% of Lumentum’s outstanding shares. Basic
and diluted net (loss) income per share for all periods through June 27, 2015 is calculated using the shares of Lumentum common stock outstanding on
August 1, 2015. Refer to " Note 4. Earnings Per Share " to the audited annual combined financial statements for more detail.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the audited combined financial statements and the corresponding notes included elsewhere in
this Annual Report on Form 10-K. 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.
Separation from JDSU
We were incorporated in Delaware as a wholly owned subsidiary of Viavi on February 10, 2015 and comprise the former communications and commercial
optical products (“CCOP”) segment and WaveReady product lines of JDSU. Our Registration Statement on Form 10 was declared effective by the U.S. Securities
and Exchange Commission on July 16, 2015. On August 1, 2015, we became an independent publicly-traded company through the distribution by JDSU to its
stockholders of 80.1% of our outstanding common stock (the “Separation”). Each JDSU stockholder of record as of the close of business July 27, 2015 received
one share of Lumentum common stock for every five shares of JDSU common stock held on the record date. JDSU was renamed Viavi Solutions Inc. ("Viavi") in
connection with the Separation and retained ownership of 19.9% of Lumentum’s outstanding shares. Our common stock began trading “regular-way” under the
ticker “LITE” on the NASDAQ stock market on August 4, 2015.
Our historical combined financial statements have been prepared on a stand-alone basis and are derived from Viavi's consolidated financial statements and
accounting records. The combined financial statements reflect our financial position, results of operations, comprehensive income and cash flows as we were
operated as part of Viavi prior to the Separation, in conformity with U.S. generally accepted accounting principles.
The combined financial statements include the attribution of certain assets and liabilities that were historically held at the Viavi level but which were
specifically identified or attributed to us. In the combined financial statements, we attributed all cash and cash equivalents generated by our activity in the legal
entities that were transferred to us from Viavi in connection with the Separation. Cash management and financing transactions relating to our business are
accounted for through the Viavi net investment account on the combined balance sheets. None of the Viavi cash and cash equivalents or short-term investments
held by other Viavi legal entities was attributed to us in the combined financial statements, with the exception of short-term investments held related to our portion
of the deferred compensation plan. Viavi's debt and related interest expense were not attributed or allocated to us for the periods presented since we are not the
legal obligor of the debt and Viavi's borrowings were not directly attributable to us. All intercompany transactions between us and Viavi were considered to be
effectively settled in the combined financial statements at the time the transactions were recorded. The total net effect of the settlement of these intercompany
transactions is reflected in the combined statements of cash flows as a financing activity and on the combined balance sheets as Viavi net investment.
The combined statements of operations includes our direct expenses for cost of sales, R&D, sales and marketing, and administration as well as allocations of
expenses arising from shared services and infrastructure provided by Viavi to us. These allocated expenses include costs of information technology, human
resources, accounting, legal, real estate and facilities, corporate marketing, insurance, treasury and other corporate and infrastructure services. In addition, other
costs allocated to us include restructuring and stock-based compensation related to Viavi's corporate and shared services employees. These expenses were allocated
to us using estimates that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by our business. The allocation
methods include revenue, headcount, square footage, actual consumption and usage of services and others.
Our Industries and Developments
We are an industry leading provider of optical and photonic products by revenue and market share addressing a range of end-market applications including
Datacom and Telecom networking and commercial lasers for manufacturing, inspection and life-science applications. We are using 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 3-D sensing for consumer electronics and diode light sources for a variety of consumer and industrial applications.
We operate in two reportable segments:
• Optical Communications ("OpComms")
• Commercial Lasers ("Lasers")
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Our operations for these reportable segments are not distinct and separate; rather this segmentation reflects different end-markets with their own unique
dynamics.
OpComms
Our OpComms products address the following markets: Telecom, Datacom and consumer and industrial ("Consumer and Industrial").
Our OpComms products include a wide range of components, modules and subsystems to support and maintain customers in our two primary markets:
Telecom and Datacom. The Telecom market includes carrier networks for access (local), metro (intracity), long-haul (city-to-city and worldwide) and submarine
(undersea) networks. The Datacom market addresses enterprise, cloud and data center applications, including storage-access networks ("SANs"), local-area
networks ("LANs") and Ethernet wide-area networks ("WANs"). These products enable the transmission and transport of video, audio and text data over high-
capacity fiber-optic cables. We maintain leading positions in the fastest-growing OpComms markets, including reconfigurable optical add/drop multiplexers
("ROADMs"), tunable 10-gigabit small form-factor pluggable transceivers and tunable small form-factor pluggables. Our growing portfolio of pluggable
transceivers supports LAN/SAN needs and the cloud for customers building proprietary data center networks.
In the Consumer and Industrial markets, our OpComms products include our light source product which is integrated into 3-D sensing platforms being used
in applications for gaming, computing and home entertainment. These systems simplify the way people interact with technology by enabling the use of natural
body gestures, like the wave of a hand, to control a product or application. Emerging applications for this technology include in-cabin tracking in cars, self-
navigating robotics and drones in industrial applications and 3-D capture of objects coupled with 3-D printing.
Our OpComms customers include Alcatel-Lucent International, Ciena Corporation, Cisco Systems, Inc., Coriant GmbH, Fujitsu Network Communications,
Inc., Google Inc., Huawei Technologies Co Ltd., Microsoft Corporation, and Nokia Networks.
Lasers
Our Lasers products serve our customers in markets and applications such as manufacturing, biotechnology, graphics and imaging, remote sensing, and
precision machining such as drilling in printed circuit boards, wafer singulation and solar cell scribing. Our Lasers products are used in a variety of OEM
applications.
OEM applications use our products including diode-pumped solid-state, fiber, diode, direct-diode and gas lasers such as argon-ion and helium-neon lasers.
Diode-pumped solid-state and fiber lasers provide excellent beam quality, low noise and exceptional reliability and are used in biotechnology, graphics and
imaging, remote sensing, materials processing and precision machining applications. Diode and direct-diode lasers address a wide variety of applications, including
laser pumping, thermal exposure, illumination, ophthalmology, image recording, printing, plastic welding and selective soldering. Gas lasers such as argon-ion and
helium-neon lasers provide a stable, low-cost and reliable solution over a wide range of operating conditions, making them well suited for complex, high-resolution
OEM applications such as flow cytometry, DNA sequencing, graphics and imaging and semiconductor inspection.
During the third quarter of fiscal 2014, Viavi acquired Time-Bandwidth, a provider of high-powered and ultrafast lasers for the industrial and scientific
markets and whose assets and liabilities we succeeded to in the Separation. Manufacturers use high-power, ultrafast lasers to create micro parts for consumer
electronics and to process semiconductor chips. Use of ultrafast lasers for micromachining applications is being driven primarily by the increasing use of consumer
electronics and connected devices globally.
Our Lasers customers include Amada Co., Ltd., ASML Holding N.V., Beckman Coulter, Inc., Becton, Dickinson and Company, DISCO Corporation, Electro
Scientific Industries, Inc., EO Technics Co., Ltd. and KLA-Tencor Corporation.
Critical Accounting Policies and Estimates
The preparation of our combined financial statements in conformity with accounting principles generally accepted in the United States requires us to make
estimates and judgments that affect the reported amounts of assets and liabilities, net revenue and expenses, and the related disclosures. We base our estimates on
historical experience, our knowledge of economic and market factors and various other assumptions that we believe to be reasonable under the circumstances.
Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things,
many factors outside of our control, such as demand for our products and economic conditions. Accordingly, our estimates and judgments may prove to be
incorrect and actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies are
affected by significant estimates, assumptions and judgments used in the preparation of our combined financial statements:
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Revenue Recognition
We recognize revenue when all four revenue recognition criteria have been met: (i) persuasive evidence of an arrangement exists, (ii) the product has been
delivered or the service has been rendered, (iii) the price is fixed or determinable and (iv) collection is reasonably assured. Revenue from product sales is recorded
when all of the foregoing conditions are met and risk of loss and title passes to the customer. Our products typically include a warranty and the estimated cost of
product warranty claims, based on historical experience, is recorded at the time the sale is recognized. Sales to customers are generally not subject to price
protection or return rights.
The majority of our sales are made to OEMs, distributors, resellers and end-users. These sales do not require installation of the products by us and are not
subject to other post-delivery obligations. Additionally, our sales to distributors, resellers and end-user customers typically do not have customer acceptance
provisions.
Inventory Valuation
We assess the value of our inventory on a quarterly basis and write down those inventories which are obsolete or in excess of our forecasted usage to their
estimated realizable value. Our estimates of realizable value are based upon our analysis and assumptions including, but not limited to, forecasted sales levels by
product, expected product lifecycle, product development plans and future demand requirements. Our product line management personnel play a key role in our
excess review process by providing updated sales forecasts, managing product transitions and working with manufacturing to maximize recovery of excess
inventory. If actual market conditions are less favorable than our forecasts or actual demand from our customers is lower than our estimates, we may be required to
record additional inventory write-downs. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold, resulting
in lower cost of sales and higher income from operations than expected in that period.
Allocations
Viavi has allocated certain expenses that arise from shared services and infrastructure provided by Viavi to us prior to the Separation such as the costs of
information technology, human resources, accounting, legal, real estate and facilities, corporate marketing, insurance, treasury and other corporate and
infrastructure services. In addition, other costs allocated to us include restructuring and stock-based compensation related to Viavi's corporate and shared services
employees. These expenses are allocated to us using estimates that we consider to be a reasonable reflection of the utilization of services provided to or benefits
received by our business. The allocation methods include revenue, headcount, square footage, actual consumption and usage of services and others.
Stock-Based Compensation
Our employees have historically participated in Viavi's stock-based benefit plans and continued participating until consummation of the Separation. Stock-
based compensation has been allocated to us based on the equity awards granted to our employees as well as the allocation of expenses from Viavi's employees in
corporate and shared services functions.
Stock-based compensation is measured at grant date, based on the fair value of the award, and recognized as compensation over the requisite service period.
The fair value of the time-based RSUs is based on the closing market price of Viavi common stock on the grant date of the award. We use the Monte Carlo
simulation to estimate the fair value of RSUs with market conditions ("MSUs"). We estimate the fair value of employee stock purchase plan ("ESPP") shares using
the Black-Scholes Merton option-pricing model. These valuation models require the input of highly subjective assumptions, including the award's expected life, the
price volatility of the underlying stock and the average volatility of peer companies.
We estimate the expected forfeiture rate and recognize only expense for those shares expected to vest. When estimating forfeitures, we consider historical
forfeiture experiences as well as our expectation about future terminations and workforce reduction programs. Estimated forfeiture is trued up to actual forfeiture
as the equity awards vest. The total fair value of the equity awards, net of forfeiture, is recorded on a straight-line basis over the requisite service periods of the
awards, which is generally the vesting period, except for MSUs which are amortized on a graded vesting basis.
Goodwill Valuation
We test goodwill for possible impairment on an annual basis in our fourth quarter and at any other time if events occur or circumstances indicate that the
carrying amount of goodwill may not be recoverable. Circumstances that could trigger an impairment
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test include, but are not limited to: a significant adverse change in the business climate or legal factors, an adverse action or assessment by a regulator, changes in
customers, target markets and strategy, unanticipated competition, loss of key personnel, or the likelihood that a reporting unit or significant portion of a reporting
unit will be sold or otherwise disposed.
An entity has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.
If an entity determines that as a result of the qualitative assessment that it is more likely than not (i.e., greater than 50% likelihood) that the fair value of a reporting
unit is less than its carrying amount, then the quantitative test is required. Otherwise, no further testing is required. The two-step quantitative goodwill impairment
test requires us to estimate the fair value of our reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is
potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis, we measure and record an impairment loss equal to the
excess of the carrying value of the reporting unit's goodwill over its implied fair value, if any.
Application of the goodwill impairment test requires judgments, including: identification of the reporting units, assigning assets and liabilities to reporting
units, assigning goodwill to reporting units, a qualitative assessment to determine whether there are any impairment indicators, and determining the fair value of
each reporting unit. We historically estimated the fair value of a reporting unit using the market approach, which estimates the fair value based on comparable
market prices. Significant estimates in the market approach include: identifying similar companies with comparable business factors such as size, growth,
profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit.
We base our estimates on historical experience and on various assumptions about the future that we believe are reasonable based on available information.
Unanticipated events and circumstances may occur that affect the accuracy of our assumptions, estimates and judgments. For example, if the price of our common
stock were to significantly decrease combined with other adverse changes in market conditions, thus indicating that the underlying fair value of our reporting units
may have decreased, we might be required to reassess the value of our goodwill in the period such circumstances were identified.
Long-lived Asset Valuation (Property, Plant and Equipment and Intangible Assets Subject to Amortization)
We test long-lived assets for recoverability, at the asset group level, when events or changes in circumstances indicate that their carrying amounts may not be
recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction
of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset;
and current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.
Recoverability is assessed based on the carrying amounts of the long-lived assets or asset groups and its fair value which is generally determined based on the
sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisals in certain instances. An
impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
Income Taxes
We have calculated our taxes on a separate tax return basis. However, the amounts recorded are not necessarily representative of the amounts that would have
been reflected in the financial statements had we been an entity that operated independently of Viavi. Our operations in the United States have historically been
transacted within the same Viavi U.S. legal entities as the other Viavi businesses which have filed U.S. and state income tax returns on that basis. Accordingly, we
are not able to retain many of the tax attributes attributable to our business as a matter of U.S. tax law. Therefore, we have not reflected on the balance sheet
deferred tax assets and the corresponding valuation allowance related to approximately $5.8 billion of federal net operating losses, $1.0 billion of state net
operating losses, $56.3 million of federal tax credits and $5.5 million of state tax credits related to our business but which cannot be transferred as a matter of U.S.
tax law. Some of our foreign entities have historically housed both our business and other Viavi businesses. Accordingly, we have not reflected on the balance
sheet deferred tax assets related to approximately $38.2 million of our net operating losses that have been utilized by Viavi's other businesses in those foreign
entities. We have reflected deferred tax assets related to foreign research tax incentives of approximately $6.1 million that were generated by other Viavi
businesses in those foreign entities and which will be retained by us. Also, it is possible that we will make different tax accounting elections and assertions, such as
the amount of earnings that will be permanently reinvested outside the United States following our distribution from Viavi.
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In accordance with the authoritative guidance on accounting for income taxes, we recognize income taxes using an asset and liability approach. This
approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in our combined financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of the enacted
tax law and the effects of future changes in tax laws or rates are not anticipated.
The authoritative guidance provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur based
on an evaluation of both positive and negative evidence and the relative weight of the evidence. With the exception of certain international jurisdictions, we have
determined that at this time it is more likely than not that deferred tax assets attributable to the remaining jurisdictions will not be realized, primarily due to
uncertainties related to our ability to utilize our net operating loss carryforwards before they expire. Accordingly, we have established a valuation allowance for
such deferred tax assets. If there is a change in our ability to realize our deferred tax assets for which a valuation allowance has been established, then our tax
provision may decrease in the period in which we determine that realization is more likely than not. Likewise, if we determine that it is not more likely than not
that deferred tax assets will be realized, then a valuation allowance may be established for such deferred tax assets and our tax provision may increase in the period
in which we make the determination.
The authoritative guidance on accounting for uncertainty in income taxes clarifies the accounting for uncertainty in income taxes recognized in an entity's
financial statements and prescribes the recognition threshold and measurement attributes for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Additionally, it provides guidance on recognition, classification, and disclosure of tax positions. We are subject to
income tax audits by the respective tax authorities in all of the jurisdictions in which we operate. The determination of tax liabilities in each of these jurisdictions
requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. We recognize liabilities based on our estimate of whether,
and the extent to which, additional tax liabilities are more likely than not. If we ultimately determine that the payment of such a liability is not necessary, then we
reverse the liability and recognize a tax benefit during the period in which the determination is made that the liability is no longer necessary.
The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that we make certain estimates and
judgments. Changes to these estimates or a change in judgment may have a material impact on our tax provision in a future period.
Restructuring Accrual
Costs associated with restructuring activities are recognized when they are incurred. However, in the case of leases, the expense is estimated and accrued
when the property is vacated. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic
reassessments of estimates made from the time the property was vacated, including evaluating real estate market conditions for expected vacancy periods and sub-
lease income. We recognize a liability for post-employment benefits for workforce reductions related to restructuring activities when payment is probable and the
amount is reasonably estimable. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that
these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a
portion of such provisions. In addition to the restructuring plans directly attributable to us, a portion of restructuring and related charges related to corporate and
shared services employees was allocated by Viavi to us. Refer to " Note 3. Transactions with Viavi " and " Note 9. Restructuring and Related Charges " to the
audited annual combined financial statements for more detail.
Loss Contingencies
We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of
an asset or the occurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss is
accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly
evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.
Recently Issued Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (“FASB”) issued guidance to change the subsequent measurement of inventory from lower of cost or
market to lower of cost and net realizable value. The guidance is effective for us in the first quarter of fiscal 2018. Earlier application is permitted as of the
beginning of an interim or annual reporting period. We are evaluating the impact of adopting this new accounting guidance on our combined financial statements.
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In May 2015, the FASB issued guidance to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is
measured using a net asset value per share practical expedient. The guidance is effective for us in the first quarter of fiscal 2017 and may apply to certain pension
assets. The guidance will be applied retrospectively and earlier adoption is permitted. We are evaluating the impact of adopting this new accounting guidance on
our combined financial statements.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance to provide a practical expedient that permits the entity
to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient
consistently from year to year. This guidance is effective for us in the first quarter of fiscal 2017. Prospective application is required, and early adoption is
permitted. We are evaluating the impact of adopting this new accounting guidance on our combined financial statements.
In May 2014, the FASB issued new authoritative guidance related to revenue recognition. This guidance will replace current U.S. GAAP guidance on this
topic and eliminate industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized.
The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance allows for either full retrospective adoption or
modified retrospective adoption. The FASB deferred the effective date for this guidance by one year to December 15, 2017 for annual reporting periods beginning
after that. Earlier application of this guidance is permitted but not before the original date of December 15, 2016. We are evaluating the impact that this new
accounting guidance will have on our combined financial statements and the related disclosures.
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 Combined Statements of Operations items as a percentage of net revenue:
Segment net revenue:
OpComms
Lasers
Net revenue
Cost of sales
Amortization of acquired technologies
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Restructuring and related charges
Total operating expenses
(Loss) income from operations
Interest and other income (expense), net
Interest expense
(Loss) income before taxes
Benefit from income taxes
Net (loss) income
June 27, 2015
Years Ended
June 28, 2014
June 29, 2013
82.9 %
85.0 %
84.8 %
17.1
100.0
68.3
0.9
30.8
16.8
15.4
1.4
33.6
(2.8)
—
(0.1)
(2.9)
(2.5)
(0.4)%
15.0
100.0
67.5
1.1
31.4
16.5
13.2
0.6
30.3
1.1
0.1
—
1.2
(0.1)
1.3 %
15.2
100.0
69.5
1.6
28.9
14.8
13.3
0.3
28.4
0.5
0.1
(0.1)
0.5
(0.3)
0.8 %
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Financial
Data
for
Fiscal
2014,
2013
and
2012
The following table summarizes selected Combined Statement of Operations items ( in millions, except for percentages ):
2015
2014
Change
Percentage
Change
2014
2013
Change
Percentage
Change
Segment net revenue:
OpComms
Lasers
Net revenue
Gross profit
Gross margin
$
$
$
694.1
$
695.1
$
143.0
837.1
$
122.8
817.9
$
(1.0)
20.2
19.2
(0.1)% $
695.1
$
653.1
$
16.4
2.3 % $
122.8
817.9
$
116.8
769.9
$
42.0
6.0
48.0
6.4%
5.1
6.2%
257.9
$
256.6
$
1.3
0.5 % $
256.6
$
222.8
$
33.8
15.2%
30.8%
31.4%
31.4%
28.9%
Research and development
Percentage of net revenue
140.8
134.9
5.9
4.4 %
134.9
113.7
21.2
18.6%
16.8%
16.5%
16.5%
14.8%
Selling, general and administrative
128.9
108.2
20.7
19.1 %
108.2
102.6
5.6
5.5%
Percentage of net revenue
15.4%
13.2%
13.2%
13.3%
Restructuring and related charges
11.6
4.8
6.8
141.7 %
Percentage of net revenue
1.4%
0.6%
4.8
0.6%
2.6
0.3%
2.2
84.6%
Net Revenue
Net revenue increase d by $19.2 million , or 2.3% , during fiscal 2015 compared to fiscal 2014 . This increase was primarily due to an increase in net revenue
from our Lasers segment.
OpComms net revenue decrease d $1.0 million , or 0.1% , during fiscal 2015 compared to fiscal 2014 . This was driven by $40.9 million of net revenue
decreases from products addressing the Consumer and Industrial market, primarily due to lower demand from a key customer for 3D sensing products in the
current period compared to prior period when our customer launched its next generation gaming console. This decrease was almost entirely offset by $39.9 million
of net revenue increases driven by the ramp of new products for the Datacom market and higher demand for our Telecom products.
Lasers net revenue increase d $20.2 million , or 16.4% , in fiscal 2015 compared to fiscal 2014 . This increase was primarily driven by increased revenue
from our next generation products, coupled with incremental net revenue from the acquisition of Time-Bandwidth in the third quarter of fiscal 2014. This was
partially offset by decreased revenue from lower demand for other Laser products.
Net revenue increase d by $48.0 million , or 6.2% , during fiscal 2014 compared to fiscal 2013 . This increase was primarily due to an increase in net revenue
from our OpComms segment.
OpComms net revenue increase d $42.0 million , or 6.4% , during fiscal 2014 compared to fiscal 2013 . This was driven by $61.9 million of net revenue
increases primarily from products addressing the Consumer and Industrial and Datacom markets. These increases were primarily due to higher demand for our 3-D
sensing light source product related to the launch of one of our customers' next generation gaming console in the Consumer and Industrial market and for our 10G
and 40G products in the Datacom market. This was partially offset by a decrease in net revenue of $19.9 million from products addressing the Telecom market
primarily due to lower spending on new network developments by large service providers.
Lasers net revenue increase d $6.0 million , or 5.1% , in fiscal 2014 compared to fiscal 2013 . This increase was primarily driven by incremental net revenue
from the acquisition of Time-Bandwidth in fiscal 2014 and increased revenue from our next generation products, partially offset by net revenue decreases from
other Lasers products.
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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, 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
exceeded 10% of our total net revenue ( dollars in millions ):
Net revenue:
Americas:
United States
Mexico
Other Americas
Total Americas
Asia-Pacific:
Hong Kong
Japan
Other Asia-Pacific
Total Asia-Pacific
EMEA
Total net revenue
* Represents less than 10% of total net revenue
June 27, 2015
Years Ended
June 28, 2014
June 29, 2013
$
$
$
$
$
$
162.4
112.7
31.1
306.2
120.4
106.6
174.4
401.4
129.5
837.1
19.4% $
13.5
3.6
36.5% $
14.4% $
12.7
20.9
48.0% $
177.5
111.3
30.3
319.1
128.7
97.6
138.6
364.9
21.7% $
13.6
3.7
39.0% $
15.8% $
11.9
16.9
44.6% $
202.0
*
125.9
327.9
126.6
78.4
125.6
330.6
26.2%
*
16.4
42.6%
16.4%
10.2
16.3
42.9%
15.5% $
133.9
16.4% $
111.4
14.5%
$
817.9
$
769.9
During fiscal 2015 , 2014 and 2013 , net revenue from customers outside the United States, based on customer shipping location, represented 80.6% , 78.3%
and 73.8% of net revenue, respectively. 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.
During fiscal 2015 , 2014 and 2013 , net revenue generated from a single customer which represented greater than 10% of total net revenue are summarized
as follows ( in millions ):
Ciena
Google
Cisco
*Represents less than 10% of total net revenue
**The customers listed in the table above are attributable to our OpComms segment.
37
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
$
$
120.4
$
*
98.7
130.2
84.6
*
$
$
125.6
*
87.7
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Gross Margin and Segment Gross Margin
The following table summarizes segment gross margin and combined gross margin for fiscal 2015, 2014 and 2013 ( in millions, except for percentages ):
OpComms
Lasers
Segment total
Unallocated corporate items (1)
Total
Gross Profit
Gross Margin
2015
2014
2013
2015
2014
2013
$
$
$
204.8 $
212.3 $
67.4
59.8
272.2 $
272.1 $
(14.3)
(15.5)
257.9 $
256.6 $
187.7
52.8
240.5
(17.7)
222.8
29.5%
47.1%
32.5%
30.5%
48.7%
33.3%
28.7%
45.2%
31.2%
30.8%
31.4%
28.9%
(1) The unallocated corporate items for the years presented include the effects of amortization of acquired developed technology intangible assets, share-
based compensation and certain other charges related to non-recurring activities. 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 in fiscal 2015 decrease d 0.6 percentage points to 30.8% from 31.4% in fiscal 2014 . This decrease was primarily due to decreases in
OpComms and Lasers gross margins as discussed below, partially offset by a reduction in amortization of developed technology driven by certain significant
intangible assets becoming fully amortized in the second half of fiscal 2014.
Gross margin in fiscal 2014 increase d 2.5 percentage points to 31.4% from 28.9% in fiscal 2013 . This increase was primarily due to improvements in
OpComms and Lasers gross margins as discussed below, coupled with a reduction in amortization of developed technology driven by certain significant intangible
assets becoming fully amortized in the second half of fiscal 2013.
As discussed in more detail under "Net Revenue" above, we sell products in certain markets that are consolidating, undergoing product, architectural and
business model transitions, have high customer concentrations, are highly competitive (increasingly due to Asia-Pacific-based competition), 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.
Segment Gross Margin
OpComms
OpComms gross margin in fiscal 2015 decrease d 1.0 percentage points to 29.5% from 30.5% in fiscal 2014 . This decrease was primarily due to low gross
margin products comprising a larger portion of our overall product mix.
OpComms gross margin in fiscal 2014 increase d 1.8 percentage points to 30.5% from 28.7% in fiscal 2013 . This increase was primarily due to high gross
margin products comprising a larger portion of our overall product mix coupled with cost reductions in fiscal 2014.
Lasers
Lasers gross margin in fiscal 2015 decrease d 1.6 percentage points to 47.1% from 48.7% in fiscal 2014 . This decrease was primarily due to low gross
margin products comprising a larger portion of our overall product mix in the Commercial Lasers market.
Lasers gross margin in fiscal 2014 increase d 3.5 percentage points to 48.7% from 45.2% in fiscal 2013 . This increase was primarily due to higher sales
volume, which improved factory utilization, coupled with improvements in yield and high gross margin products comprising a larger portion of our overall product
mix.
Research and Development
R&D expense increase d $5.9 million , or 4.4% , in fiscal 2015 compared to fiscal 2014 as we increased our investment in new R&D programs and the
development of our product portfolio. In connection with this increased investment, our employee compensation expense increased by $5.8 million primarily for
additional headcount to support our various R&D programs. As a percentage of net revenue, R&D expense increase d by 0.3 percentage points in fiscal 2015
primarily due to our increased investments
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in R&D, including the acquisition of Time-Bandwidth in fiscal 2014, in order to develop new technologies and products that we believe offer our customers
increased value and strengthen our position in our core markets.
R&D expense increase d $21.2 million , or 18.6% , in fiscal 2014 compared to fiscal 2013 as we increased our investment in new R&D programs and the
development of our product portfolio. In connection with this increased investment, our employee compensation expense increased by $13.9 million primarily due
to additional headcount to support our various R&D programs. Additionally, R&D offsets from customer-funded development projects were $3.0 million higher in
fiscal 2013, which contributed to the increase in R&D expense in fiscal 2014. As a percentage of net revenue, R&D expense increase d by 1.7 percentage points in
fiscal 2014 primarily due to our increased investments in R&D, including the acquisition of Time-Bandwidth in fiscal 2014, in order to develop new technologies
and products that we believe offer our customers increased value and strengthen our position in our core markets.
We believe that continuing our investments in R&D is critical to attaining our strategic objectives. We 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 to increase in absolute dollars in future quarters.
Selling, General and Administrative
SG&A expense increase d $20.7 million , or 19.1% , in fiscal 2015 compared to fiscal 2014 . This increase was primarily driven by a $19.0 million increase
in corporate allocations by Viavi primarily related to pre-Separation costs for advisory services. As a percentage of net revenue, SG&A expense increas ed by 2.2
percentage points in fiscal 2015 .
SG&A expense increase d $5.6 million , or 5.5% , in fiscal 2014 compared to fiscal 2013 . This increase was primarily driven by a $5.3 million increase in
corporate allocations by Viavi for general support services. The increase in allocated corporate charges, which includes information technology, finance and human
resources, was primarily due to an increase in the proportion of shared resources used to support our business as it grew in relation to Viavi's consolidated results.
As a percentage of net revenue, SG&A expense remained relatively flat, decreas ing by 0.1 percentage points in fiscal 2014 .
We intend to continue to focus on reducing our SG&A expense as a percentage of net revenue. However, we may experience in the future, certain non-core
expenses, such as mergers and acquisitions-related expenses and litigation expenses, which could increase our SG&A expenses and potentially impact our
profitability expectations in any particular quarter.
Restructuring and Related Charges
We have reduced costs through targeted restructuring efforts intended to consolidate our operations, rationalize the manufacturing of our products and align
our business in response to market conditions. We estimate annualized cost savings of approximately $17.3 million excluding any one-time charge as a result of the
restructuring activities initiated in the past year. Refer to "Note 9. Restructuring and Related Charges" to the audited annual combined financial statements for
more information.
As of June 27, 2015 , our total restructuring accrual was $4.9 million.
During fiscal 2015, we recorded $11.6 million in restructuring and related charges. The charges are a combination of new and previously announced
restructuring plans and are primarily the result of the following:
•
•
•
During the second and fourth quarters of fiscal 2015, management approved restructuring plans to optimize operations and gain efficiencies by closing
the Bloomfield, Connecticut site and consolidating roles and responsibilities across functions in connection with the Separation. As a result, a
restructuring charge of $5.1 million was recorded for severance and employee benefits during fiscal 2015. In total approximately 200 employees in
manufacturing, R&D and SG&A functions located in North America, Europe and Asia were impacted. Payments related to the remaining severance
and benefits accrual are expected to be paid by the end of the second quarter of fiscal 2017.
During the first quarter of fiscal 2015, management approved a plan to optimize operations and gain efficiencies by closing the Robbinsville, New
Jersey site and consolidating roles and responsibilities across North America. As a result, a restructuring charge of $1.5 million was recorded for
severance and employee benefits during fiscal 2015. In total approximately 30 employees in manufacturing, R&D and SG&A functions located in
North America were impacted. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the first quarter
of fiscal 2016.
The accompanying audited annual combined statements of operations include allocated cost of $3.9 million for restructuring and related charges related
to Viavi's corporate and shared services employees.
During fiscal 2014, we recorded $4.8 million in restructuring and related charges. The charges are primarily the result of the following:
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•
•
•
During the fourth quarter of fiscal 2014, management approved a plan to close the Serangoon office located in Singapore and move to a lower cost
region in order to reduce manufacturing and R&D expenses. As a result, a restructuring charge of $1.7 million was recorded for severance and
employee benefits for approximately 40 employees primarily in manufacturing and R&D functions. Payments related to the remaining severance and
benefits accrual were paid by the end of the fourth quarter of fiscal 2015.
We also incurred restructuring and related charges of $0.8 million from restructuring plans approved prior to fiscal 2014 primarily related to
manufacturing transfer costs for transfer of certain production processes into existing sites in the United States or to contract manufacturers.
The accompanying audited annual combined statements of operations include allocated costs of $2.3 million for restructuring and related charges
related to Viavi's corporate and shared services employees.
During fiscal 2013, we recorded $2.6 million in restructuring and related charges. The charges are primarily the result of the following:
•
•
•
During the fourth quarter of fiscal 2013, management approved a plan to re-align certain functions to drive organizational efficiency and enhance the
product line marketing leadership. As a result, a restructuring charge of $1.2 million was recorded for severance and employee benefits for
approximately 30 employees primarily in manufacturing, R&D and SG&A functions located in the North America and Asia. Payments related to the
severance and benefits accrual were paid by the end of the fourth quarter of fiscal 2014.
During the third quarter of fiscal 2013, management approved a plan to transition certain functions to an offshore contract manufacturer to align with
our continuous efforts to optimize our supply chain. As a result, a restructuring charge of $0.9 million was recorded for severance and employee
benefits for approximately 40 employees primarily in manufacturing, R&D and SG&A functions located in the United States. Payments related to the
severance and benefits accrual are expected to be paid by the end of the first quarter of fiscal 2017.
During the first quarter of fiscal 2013, management approved a plan to terminate the concentrated photovoltaic product line based on limited
opportunities for market growth. As a result, a restructuring charge of $0.4 million was recorded for severance and employee benefits for approximately
10 employees primarily in manufacturing, R&D and SG&A functions located in United States, Europe, and Asia. Payments related to the severance and
benefits accrual were paid by the end of the fourth quarter of fiscal 2013.
Our restructuring and other lease exit cost obligations are net of sublease income of approximately $0.6 million. Our ability to generate sublease income, as
well as our ability to terminate lease obligations and recognize the anticipated related savings, is highly dependent upon economic conditions, particularly
commercial real estate market conditions in certain geographies, at the time we negotiate the lease termination and sublease arrangements with third parties as well
as the performances by such third parties of their respective obligations. While the amount we have accrued represents the best estimate of the remaining
obligations we expect to incur in connection with these plans, estimates are subject to change. Routine adjustments are required and may be required in the future
as conditions and facts change through the implementation period. If macroeconomic conditions decline, particularly as they pertain to the commercial real estate
market, or if, for any reason, tenants under subleases fail to perform their obligations, we may be required to reduce estimated future sublease income and adjust
the estimated amounts of future settlement agreements, and accordingly, increase estimated costs to exit certain facilities. Amounts related to the lease expense, net
of anticipated sublease proceeds, will be paid over the respective lease terms through the third quarter of fiscal 2018.
Interest and Other Income (Expense), Net
Interest and other income (expense), net is comprised substantially of gains and losses associated with the re-measurement of non-functional currency
denominated monetary assets and liabilities, an allocation from Viavi of gains and losses on the foreign currency forward contracts utilized in Viavi's balance sheet
hedging program, as well as other non-recurring transactions outside of the normal course of business.
Interest and other income (expense), net was $(0.4) million in fiscal 2015 as compared to $1.3 million in fiscal 2014 . This $1.7 million change was primarily
due to a foreign exchange loss of $0.3 million in fiscal 2015 compared to a foreign exchange gain of $1.6 million in fiscal 2014, both of which include the
offsetting impact allocated to us from Viavi's balance sheet hedging program.
Interest and other income (expense), net was $1.3 million in fiscal 2014 as compared to $0.8 million in fiscal 2013 . This $0.5 million change was primarily
due to a foreign exchange gain of $1.6 million in fiscal 2014 compared to a foreign exchange gain of $1.1 million in fiscal 2013, both of which include the
offsetting impact allocated to us from Viavi's balance sheet hedging program.
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Benefit from Income Tax
We have calculated our taxes on a separate return basis. However, the amounts recorded are not necessarily representative of the amounts that would have
been reflected in the financial statements had we been an entity that operated independently of Viavi. Consequently our future results may be materially different
from our historical results.
Fiscal 2015 Benefit from Income Taxes
We recorded an income tax benefit of $21.1 million for fiscal 2015 . The expected tax benefit derived by applying the federal statutory rate to our loss before
income taxes for fiscal 2015 differed from the income tax expense recorded primarily as a result of domestic and foreign losses that were not realized due to
valuation allowances and offset by a $21.8 million tax benefit recognized upon the settlement of an audit in a non-U.S. jurisdiction.
Based on a jurisdiction by jurisdiction review of anticipated future income and due to the continued economic uncertainty in the industry, management has
determined that in many of our jurisdictions, it is more likely than not that our net deferred tax assets will not be realized in those jurisdictions. During fiscal 2015 ,
the valuation allowance for deferred tax assets decreased by $24.6 million. The decrease was primarily related to the utilization of foreign net operating losses and
the amortization of intangibles. We are routinely subject to various federal, state and foreign audits by taxing authorities. We believe that adequate amounts have
been provided for any adjustments that may result from these examinations.
Fiscal 2014 Benefit from Income Taxes
We recorded an income tax benefit of $0.9 million for fiscal 2014 . The expected tax expense derived by applying the federal statutory rate to our income
before income taxes for fiscal 2014 differed from the income tax benefit recorded primarily as a result of the utilization of foreign net operating losses and the
recognition of tax credits generated during the year.
Based on a jurisdiction by jurisdiction review of anticipated future income and due to the continued economic uncertainty in the industry, management has
determined that in many of our jurisdictions, it is more likely than not that our net deferred tax assets will not be realized in those jurisdictions. During fiscal 2014 ,
the valuation allowance for deferred tax assets decreased by $30.6 million. The decrease was primarily related to the amortization of intangibles and tax deductible
goodwill. We are routinely subject to various federal, state and foreign audits by taxing authorities. We believe that adequate amounts have been provided for any
adjustments that may result from these examinations.
Fiscal 2013 Benefit from Income Taxes
We recorded an income tax benefit of $2.8 million for fiscal 2013 . The expected tax expense derived by applying the federal statutory rate to our income
before income taxes for fiscal 2013 differed from the income tax benefit recorded primarily due to the utilization of foreign net operating losses and the recognition
of tax credits generated during the current year.
Based on a jurisdiction by jurisdiction review of anticipated future income and due to the continued economic uncertainty in the industry, management has
determined that in many of our jurisdictions, it is more likely than not that our net deferred tax assets will not be realized in those jurisdictions. During fiscal 2013 ,
the valuation allowance for deferred tax assets decreased by $40.1 million. The decrease was primarily related to the amortization of intangibles and tax deductible
goodwill. We are routinely subject to various federal, state and foreign audits by taxing authorities. We believe that adequate amounts have been provided for any
adjustments that may result from these examinations.
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Contractual Obligations
The following table summarizes our contractual obligations at June 27, 2015 , 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—expected cash payments
$
2.1 $
Purchase obligations (1)
Operating lease obligations (1)
Pension and post-retirement benefit payments (2)
Other non-current liabilities related to an acquisition holdbacks (3)
94.8
29.6
2.1
2.3
0.3 $
90.9
6.6
—
2.3
0.6 $
— $
3.9
11.9
0.1
—
—
5.9
0.2
—
Total
$
130.9 $
100.1 $
16.5 $
6.1 $
1.2
—
5.2
1.8
—
8.2
(1) Refer to " Note 13. Commitments and Contingencies " to the audited annual combined financial statements for more information.
(2) Refer to " Note 12. Employee Benefit Plans " to the audited annual combined financial statements for more information.
(3) Refer to " Note 6. Mergers and Acquisitions " to the audited annual combined financial statements for more information.
As of June 27, 2015 , other current liabilities and other non-current liabilities on the combined balance sheets includes $0.6 million and $0.5 million,
respectively, for restructuring and related activities in connection with our operating lease obligations disclosed above.
Purchase obligations represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet
operational requirements. Of the $94.8 million of purchase obligations as of June 27, 2015 , $47.6 million are related to inventory and the other $47.2 million are
non-inventory items.
As of June 27, 2015 , our other non-current liabilities primarily relate to asset retirement obligations and pension which are presented in various lines in 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.
Acquisitions
As part of our strategy, we are committed to the ongoing evaluation of strategic opportunities and, where appropriate, the acquisition of additional products,
technologies or businesses that are complementary to, or broaden the markets for, our products. We believe we have strengthened our business model by expanding
our addressable markets, customer base and expertise, diversifying our product portfolio, and fortifying our core businesses through acquisition as well as through
organic initiatives.
On January 27, 2014 ("Time-Bandwidth Closing Date"), Viavi completed the acquisition of Time-Bandwidth, a privately-held provider of high powered and
ultrafast lasers for industrial and scientific markets. Use of ultrafast lasers for micromachining applications is being driven primarily by the increasing use of
consumer electronics and connected devices globally. Viavi acquired all outstanding shares of Time-Bandwidth for a total purchase price of $15.0 million in cash,
including a holdback amount of approximately $2.3 million which had been withheld to satisfy potential indemnfication claims by Viavi in relation to the Time-
Bandwidth acquisition. In connection with the Separation, we succeeded to the assets and liabilities associated with the Time-Bandwidth business. During the first
quarter of fiscal 2016, we released the holdback amount of $2.3 million following the eighteen-month anniversary of the Time-Bandwidth Closing Date.
Please refer to " Note 6. Mergers and Acquisitions " to the audited annual combined financial statements for more information.
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Pension Benefits
As a result of acquiring Time-Bandwidth in January 2014, we have a pension plan for certain employees in Switzerland. This plan is open to new
participants and additional service costs are being accrued. The Switzerland plan is partially funded. As of June 27, 2015 , our pension plan was under funded by
$2.1 million since the projected benefit obligation ("PBO") exceeded the fair value of its plan assets.
We expect to contribute approximately $0.3 million to the Switzerland plan during fiscal 2016.
A key actuarial assumption in calculating the net periodic cost and the PBO is the discount rate. Changes in the discount rate impact the interest cost
component of the net periodic benefit cost calculation and PBO due to the fact that the PBO is calculated on a net present value basis. Decreases in the discount
rate will generally increase pre-tax cost, recognized expense and the PBO. Increases in the discount rate tend to have the opposite effect. We estimate a 50 basis
point decrease or increase in the discount rate would cause a corresponding increase or decrease, respectively, in the PBO of approximately $0.8 million based
upon data as of June 27, 2015 .
Financial Condition
Liquidity and Capital Resources
Historically, Viavi has provided financing, cash management and other treasury services to us. Cash transferred to and from Viavi has been recorded as
intercompany payables and receivables which are reflected in Viavi net investment in the accompanying historical combined financial statements.
As of June 27, 2015 and June 28, 2014 , our cash and cash equivalents of $14.5 million and $19.9 million , respectively, were held predominantly in Canada,
China and Japan. Although 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 dividends that may be declared, future stock repurchase programs and acquisitions. Our
intent is to indefinitely reinvest these funds outside the United States and our current plans do not demonstrate a need to repatriate them to fund our domestic
operations. However, if in the future, after the Separation, 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, we may determine that cash repatriations are necessary. Repatriation could result in
additional material U.S. federal and state income tax payments in future years. Such adverse consequences would occur, for example, if the transfer of cash into the
United States is taxed and no foreign tax credit is available to offset the U.S. tax liability, resulting in higher 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.
Fiscal 2015
As of June 27, 2015 , our combined balance of cash and cash equivalents and short-term investments decreas ed by $5.4 million , or 26.7% , to $14.8 million
from $20.2 million as of June 28, 2014 .
Cash provided by operating activities was $9.3 million , primarily resulting from $3.4 million of net loss and $69.0 million of non-cash items such
as depreciation, stock-based compensation, amortization of intangibles and changes in our deferred tax balances, offset by changes in operating assets and
liabilities of $56.3 million . Changes in our operating assets and liabilities related primarily to an increase in accounts receivable of $17.8 million , an increase in
other current and non-currents assets of $14.5 million , a decrease in income taxes payable of $10.8 million , an increase in inventories of $6.2 million and a
decrease in accrued expenses and other current and non-current liabilities of $6.9 million .
Cash used in investing activities was $53.5 million , primarily resulting from cash used for capital expenditures of $53.7 million.
Cash provided by financing activities was $40.7 million resulting from net transfers from Viavi.
Fiscal 2014
As of June 28, 2014 , our combined balance of cash and cash equivalents and short-term investments increas ed by $12.1 million , or 149.4% , to $20.2
million from $8.1 million as of June 29, 2013 .
Cash provided by operating activities was $62.8 million , primarily resulting from $10.7 million of net income and $59.4 million of non-cash items such
as depreciation, stock-based compensation, amortization of intangibles and changes in our deferred tax balances, offset by changes in operating assets and
liabilities of $7.3 million . Changes in our operating assets and liabilities related primarily to an increase in accounts receivable of $15.1 million , an increase in
inventories of $13.5 million and a decrease
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in accrued expenses and other current and non-current liabilities of $1.0 million . This was partially offset by an increase in accounts payable of $18.7 million due
to timing of payments and a decrease in other current and non-currents assets of $3.5 million .
Cash used in investing activities was $76.9 million , primarily resulting from cash used for capital expenditures of $64.2 million , including the purchase of a
fabrication facility in California that we previously leased, and $12.8 million for the acquisition of Time-Bandwidth Products .
Cash provided by financing activities was $26.2 million resulting from net transfers from Viavi.
Fiscal 2013
As of June 29, 2013 our combined balance of cash and cash equivalents and short-term investments decreas ed by $5.4 million , or 40.0% , to $8.1 million
from $13.5 million as of June 30, 2012 .
Cash provided by operating activities in fiscal 2013 was $54.9 million , primarily resulting from $6.5 million of net income and $59.3 million of non-cash
items such as depreciation, stock-based compensation, amortization of intangibles and changes in our deferred tax balances, offset by changes in operating assets
and liabilities of $10.9 million . Changes in operating assets and liabilities related primarily to an increase in other current and non-currents assets of $9.2 million ,
a decrease in accounts payable of $8.2 million due to timing of payments and an increase in inventories of $4.4 million . This was partially offset by a decrease in
accounts receivable of $6.9 million due to timing of collections , an increase in accrued expenses and other current and non-current liabilities of $3.8 million and
an increase in accrued payroll and related expenses of $2.9 million .
Cash used in investing activities was $31.9 million resulting from cash used for capital expenditures.
Cash used in financing activities was $27.7 million resulting from net transfers to Viavi.
Liquidity and Capital Resources Requirement
Our primary liquidity and capital spending requirements over at least the next 12 months will be the funding of our operating activities and capital
expenditures. As of June 27, 2015 , our expected commitments for capital expenditures totaled approximately $50.0 million. Our balance sheet subsequent to July
31, 2015 will also include the Series A Preferred Stock issued by our subsidiary, Lumentum Inc. We believe that our cash and cash equivalents, combined with
expected 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, there are a number of factors that could positively or negatively impact our liquidity position, including:
•
•
•
•
•
•
•
•
•
•
•
global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers;
changes in accounts receivable, inventory or other operating assets and liabilities which affect our working capital;
increase in capital expenditures to support the revenue growth opportunity of our business;
the tendency of customers to delay payments or to negotiate favorable payment terms to manage their own liquidity positions;
timing of payments to our suppliers;
factoring or sale of accounts receivable;
volatility in fixed income and credit which impact the liquidity and valuation of our investment portfolios;
volatility in foreign exchange markets which impacts our financial results;
possible investments or acquisitions of complementary businesses, products or technologies;
issuance of debt or equity securities; and
potential funding of pension liabilities either voluntarily or as required by law or regulation.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
We conduct our business and sell our products to customers primarily in Asia, Europe, and North America. In the normal course of business, our financial
position is routinely subject to market risks associated with foreign currency rate fluctuations due to balance sheet positions in foreign currencies. Historically,
Viavi evaluated foreign exchange risks and utilizes foreign currency forward contracts to reduce such risks on our behalf, hedging the gains or losses generated by
the re-measurement of significant foreign currency denominated monetary assets and liabilities. A portion of the hedging activity results have been allocated to us
and are included in our combined statements of operations. The forward contracts Viavi utilizes as part of this hedging program, most of which have a term of less
than 120 days, were transacted near quarter end and therefore the fair value of the contracts are not significant. We anticipate that we will be exposed to the same
changes in foreign currency exchange rates as a standalone company. We intend to implement our own program to hedge balance sheet exposures that are not
denominated in the functional currencies of our subsidiaries similar to the program Viavi currently employs.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Lumentum Holdings Inc.:
In our opinion, the combined financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial
position of Lumentum Holdings Inc. and its subsidiaries at June 27, 2015 and June 28, 2014, and the results of their operations and their cash flows for each of the
three years in the period ended June 27, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related combined financial statements. These financial statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
September 25, 2015
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LUMENTUM HOLDINGS INC.
COMBINED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
Net revenue
Cost of sales
Amortization of acquired technologies
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Restructuring and related charges
Total operating expenses
(Loss) income from operations
Interest and other income (expense), net
Interest expense
(Loss) income before income taxes
Benefit from income taxes
Net (loss) income
837.1
571.6
7.6
257.9
140.8
128.9
11.6
281.3
(23.4)
(0.4)
(0.7)
(24.5)
(21.1)
(3.4)
817.9
552.3
9.0
256.6
134.9
108.2
4.8
247.9
8.7
1.3
(0.2)
9.8
(0.9)
10.7
Net (loss) income per share - basic and diluted (a)
Basic and diluted average shares outstanding (a)
$
(0.06) $
58.8
0.18 $
58.8
769.9
534.9
12.2
222.8
113.7
102.6
2.6
218.9
3.9
0.8
(1.0)
3.7
(2.8)
6.5
0.11
58.8
(a) On August 1, 2015, JDS Uniphase Corporation (“JDSU”) distributed 47.1 million shares, or 80.1% of the outstanding shares of common stock of
Lumentum Holdings Inc. (“Lumentum”) to existing holders of JDSU common stock. JDSU was renamed Viavi Solutions Inc. (“Viavi”) and at the time of
the distribution, retained 11.7 million shares, or 19.9% of Lumentum’s outstanding shares. Basic and diluted net (loss) income per share for all periods
through June 27, 2015 is calculated using the shares of Lumentum common stock outstanding on August 1, 2015. Refer to " Note 4. Earnings Per Share "
to the audited annual combined financial statements for more detail.
See accompanying notes to combined financial statements.
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LUMENTUM HOLDINGS INC.
COMBINED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in millions)
Net (loss) income
Other comprehensive loss:
Net change in cumulative translation adjustment, net of tax
Net change in defined benefit obligation, net of tax
Unrealized actuarial losses arising during the period
Net change in accumulated other comprehensive (loss) income
Comprehensive (loss) income
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
$
$
(3.4) $
10.7 $
(9.3)
(1.6)
(0.9)
(10.2)
(13.6) $
(0.3)
(1.9)
8.8 $
6.5
(1.7)
—
(1.7)
4.8
See accompanying notes to combined financial statements.
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LUMENTUM HOLDINGS INC.
COMBINED BALANCE SHEETS
(in millions, except share and par value data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepayments and other current assets
Total current assets
Property, plant and equipment, net
Goodwill and intangibles, net
Deferred income taxes
Other non-current assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued payroll and related expenses
Income taxes payable
Accrued expenses
Other current liabilities
Total current liabilities
Other non-current liabilities
Commitments and contingencies (Note 13)
Stockholders’ equity:
Viavi net investment
Accumulated other comprehensive (loss) income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to combined financial statements.
49
June 27, 2015
June 28, 2014
$
14.5
$
150.5
99.7
46.1
310.8
143.2
27.4
30.3
0.9
512.6
77.8
17.7
3.7
11.5
11.4
122.1
9.8
368.2
12.5
380.7
512.6
$
$
$
$
$
19.9
136.5
96.5
33.1
286.0
136.5
35.8
33.3
0.5
492.1
82.1
19.2
14.7
9.4
11.5
136.9
19.6
312.9
22.7
335.6
492.1
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LUMENTUM HOLDINGS INC.
COMBINED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
OPERATING ACTIVITIES:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
$
(3.4) $
10.7 $
Depreciation expense
Amortization of acquired technologies and other intangibles
Stock-based compensation
Other non-cash (income) expenses
Changes in operating assets and liabilities, net of impact of acquisitions of businesses and
dispositions of assets:
Accounts receivable
Inventories
Other current and non-currents assets
Accounts payable
Income taxes payable
Deferred taxes, net
Accrued payroll and related expenses
Accrued expenses and other current and non-current liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired
Capital expenditures
Proceeds from the sale of property and equipment
Net cash used in investing activities
FINANCING ACTIVITIES:
Net transfers from (to) Viavi
Net cash provided by (used in) financing activities
Effect of exchange rates on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
43.0
8.0
18.2
(2.1)
(17.8)
(6.2)
(14.5)
0.9
(10.8)
1.9
(1.0)
(6.9)
9.3
—
(53.7)
0.2
(53.5)
40.7
40.7
(1.9)
(5.4)
19.9
35.5
9.3
18.5
(1.4)
(15.1)
(13.5)
3.5
18.7
(0.5)
(2.5)
0.6
(1.0)
62.8
(12.8)
(64.2)
0.1
(76.9)
26.2
26.2
—
12.1
7.8
$
14.5 $
19.9 $
6.5
33.6
12.4
16.3
1.6
6.9
(4.4)
(9.2)
(8.2)
(2.7)
(4.6)
2.9
3.8
54.9
—
(31.9)
—
(31.9)
(27.7)
(27.7)
(0.8)
(5.5)
13.3
7.8
See accompanying notes to combined financial statements.
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Balance as of June 30, 2012
Net income
Other comprehensive loss
Net transfers to Viavi
Balance as of June 29, 2013
Net income
Other comprehensive loss
Net transfers from Viavi
Balance as of June 28, 2014
Net loss
Other comprehensive loss
Net transfers from Viavi
Balance as of June 27, 2015
LUMENTUM HOLDINGS INC.
COMBINED STATEMENTS OF INVESTED EQUITY
(in millions)
Viavi Net Investment
$
261.5 $
6.5
—
(10.8)
257.2
10.7
—
45.0
312.9
(3.4)
—
58.7
See accompanying notes to combined financial statements.
$
368.2 $
51
Accumulated Other
Comprehensive
Income/(Loss)
Total Invested
Equity
26.3
$
—
(1.7)
—
24.6
—
(1.9)
—
22.7
—
(10.2)
—
12.5
$
287.8
6.5
(1.7)
(10.8)
281.8
10.7
(1.9)
45.0
335.6
(3.4)
(10.2)
58.7
380.7
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
We are an industry leading provider of optical and photonic products addressing a range of end markets including data communications ("Datacom") and
telecommunications ("Telecom") networking and industrial and commercial lasers ("commercial lasers"), for manufacturing, inspection and life-science
applications.
On August 1, 2015, Lumentum Holdings Inc. (“we,” “our,” or “Lumentum”) became an independent publicly-traded company through the distribution by
JDS Uniphase Corporation (“JDSU”) to its stockholders of 80.1% of our outstanding common stock (the “Separation”). Each JDSU stockholder of record as of the
close of business July 27, 2015 received one share of Lumentum common stock for every five shares of JDSU common stock held on the record date. JDSU was
renamed Viavi and at the time of the distribution retained ownership of 19.9% of Lumentum’s outstanding shares. Lumentum was incorporated in Delaware as a
wholly owned subsidiary of Viavi on February 10, 2015 and is comprised of the existing communications and commercial optical products (“CCOP”) segment and
WaveReady product lines of Viavi. Lumentum’s Registration Statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission on
July 16, 2015. Lumentum’s common stock began trading “regular-way” under the ticker “LITE” on the NASDAQ stock market on August 4, 2015.
Basis of Presentation
Our combined financial statements have been presented on a standalone basis and are derived from the consolidated financial statements and accounting
records of Viavi. The accompanying financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission ("SEC") and are in conformity with U.S. generally accepted accounting principles ("U.S. GAAP").
We received significant management and shared administrative services from Viavi and engaged with Viavi in certain intercompany transactions. We relied
on Viavi for a significant portion of our operational and administrative support. The combined financial statements include allocation of certain Viavi corporate
expenses including costs of information technology, human resources, accounting, legal, real estate and facilities, corporate marketing, insurance, treasury and
other corporate and infrastructure services. These costs were allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro-
rata basis of revenue, square footage, headcount or other relevant measures.
Viavi uses a centralized approach to cash management and financing of its operations. In the combined financial statements, we attributed all cash and cash
equivalents generated in the legal entities that were transferred to us from Viavi in connection with the Separation. Cash management and financing transactions
relating to our business are accounted for through the Viavi net investment account on the combined balance sheets. None of the Viavi cash and cash equivalents or
short-term investments held by other Viavi legal entities was attributed to us in the combined financial statements, with the exception of short-term investments
held related to our portion of the deferred compensation plan. Viavi's debt and related interest expense were not attributed or allocated to us for the periods
presented since we are not the legal obligor of the debt and Viavi's borrowings were not directly attributable to us.
Our management ("Management") believes the assumptions and allocations underlying the combined financial statements are reasonable and appropriate.
The expenses and cost allocations have been determined on a basis that Viavi and we consider to be a reasonable reflection of the utilization of services provided
or the benefit received by us during the periods presented.
However, the amounts recorded for these transactions and allocations are not necessarily representative of the amounts that would have been reflected in the
financial statements had we been an entity that operated independently of Viavi. Consequently, our future results of operations will include costs and expenses for
us to operate as an independent company, and these costs and expenses may be materially different from our historical results of operations, statement of
comprehensive income, financial position and cash flows. Accordingly, the financial statements for these periods are not indicative of our future results of
operations, financial position and cash flows.
See " Note 3. Transactions with Viavi " in the combined financial statements for further information regarding the relationships we had with Viavi and other
Viavi businesses.
Fiscal Years
We utilize a 52-53 week fiscal year ending on the Saturday closest to June 30th. Our fiscal 2015 ended on June 27, 2015 and was a 52-week year. Our fiscal
2014 ended on June 28, 2014 and was a 52-week year. Our fiscal 2013 ended on June 29, 2013 and was a 52-week year.
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Principles of Combination
LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The combined financial statements include certain assets and liabilities that were historically held at the Viavi level which were specifically identifiable or
otherwise attributable to us. All intra-company transactions within the business were eliminated. All significant transactions between us and other businesses of
Viavi were reflected as net transfer to and from Viavi in the combined statements of invested equity. All intercompany transactions were considered to be
effectively settled for cash and were reflected as a component of financing activities as net transfers from (to) Viavi in the combined statements of cash flows at the
time the transaction was recorded.
Use of Estimates
The preparation of our combined financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the
reported amount of assets and liabilities at the date of the financial statements, the reported amount of net revenue and expenses and the disclosure of commitments
and contingencies during the reporting periods. We base estimates on historical experience and on various assumptions about the future believed to be reasonable
based on available information. Our reported financial position or results of operations may be materially different under changed conditions or when using
different estimates and assumptions, particularly with respect to significant accounting policies. If estimates or assumptions differ from actual results, subsequent
periods are adjusted to reflect more current information.
Cash and Cash Equivalents
We consider highly-liquid instruments such as money market funds with original maturities of 90 days or less at the time of purchase to be cash equivalents.
Inventories
Inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not in excess of net realizable value. We assess the
valuation on a quarterly basis and write down the value for estimated excess and obsolete inventory based upon estimates of future demand, including warranty
requirements. Our inventories include material, labor, and manufacturing overhead costs.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed by the straight-line method generally over the following estimated useful lives of
the assets: 10 to 50 years for building and improvements, 3 to 5 years for machinery and equipment, and 2 to 5 years years for furniture, fixtures, software and
office equipment. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the term of
the lease.
Goodwill
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed. We
test for impairment of goodwill on an annual basis in the fourth quarter and at any other time when events occur or circumstances indicate that the carrying amount
of goodwill may not be recoverable. Refer to "Note 8. Goodwill and Other Intangible Assets" for more information.
Circumstances that could trigger an impairment test include, but are not limited to: a significant adverse change in the business climate or legal factors, an
adverse action or assessment by a regulator, change in customer, target market and strategy, unanticipated competition, loss of key personnel, or the likelihood that
a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed.
An assessment of qualitative factors may be performed to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If
the result of the qualitative assessment is that it is more likely than not (i.e., greater than 50% likelihood) that the fair value of a reporting unit is less than its
carrying amount, then the quantitative test is required. Otherwise, no further testing is required.
Under the quantitative test, if the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recorded in the combined statements of operations. We historically estimated the fair value of a reporting unit using the market approach, which estimates the fair
value based on comparable market prices. Significant estimates in the market approach include: identifying similar companies with comparable business factors
such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of
the reporting unit.
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Intangible Assets
LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Intangible assets consist primarily of purchased intangible assets through acquisitions. Purchased intangible assets primarily include acquired developed
technologies (developed and core technology). Intangible assets are amortized using the straight-line method over the estimated economic useful lives of the assets,
which is the period during which expected cash flows support the fair value of such intangible assets.
Long-lived Asset Valuation (Property, Plant and Equipment and Intangible Assets Subject to Amortization)
We test long-lived assets for recoverability, at the asset group level, when events or changes in circumstances indicate that their carrying amount may not be
recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset, significant adverse
changes in the business climate or legal factors, accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction
of the asset, current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset, or
current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.
Recoverability is assessed based on the difference between the carrying amount of the asset and the sum of the undiscounted cash flows expected to result
from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
Pension Benefits
The funded status of our retirement-related benefit plans is measured as the difference between the fair value of plan assets and the benefit obligation at fiscal
year end, the measurement date. The funded status of a underfunded benefit plan, of which the fair value of plan assets is less than the benefit obligation, is
recognized as a non-current net pension liability in the combined balance sheets unless the fair value of plan assets is not sufficient to cover the expected payments
to be made over the next year (or operating cycle, if longer) from the measurement date. For defined benefit pension plans, the benefit obligation is the projected
benefit obligation ("PBO") which represents the actuarial present value of benefits expected to be paid upon retirement.
Net periodic pension cost (income) ("NPPC") is recorded in the combined statements of operations and includes service cost, interest cost, expected return on
plan assets, amortization of prior service cost and (gains) losses previously recognized as a component of accumulated other comprehensive income. Service cost
represents the actuarial present value of participant benefits attributed to services rendered by employees in the current year. Interest cost represents the time value
of money cost associated with the passage of time. (Gains) losses arise as a result of differences between actual experience and assumptions or as a result of
changes in actuarial assumptions. Prior service cost (credit) represents the cost of benefit improvements attributable to prior service granted in plan amendments.
(Gains) losses and prior service cost (credit) that arise during the current year are first recognized as a component of accumulated other comprehensive income in
the combined balances sheets, net of tax. Prior service cost is amortized as a component of NPPC over the average remaining service period of active plan
participants starting at the date the plan amendment is adopted. Deferred actuarial (gains) losses are subsequently recognized as a component of NPPC if they
exceed the greater of ten percent of PBO or the fair value of plan assets, with the excess amortized over the average remaining service period of active plan
participants.
The measurement of the benefit obligation and NPPC is based on our estimates and actuarial valuations, provided by third-party actuaries, which are
approved by management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service,
as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases, and mortality rates. We
evaluate these assumptions annually at a minimum. In estimating the expected return on plan assets, we consider historical returns on plan assets, adjusted for
forward-looking considerations, inflation assumptions and the impact of the active management of the plan's invested assets.
Concentration of Credit and Other Risks
Financial instruments that potentially subject our business to concentration of credit risk consist primarily of cash and cash equivalents, trade receivables as
well as foreign currency forward contracts. Our cash and cash equivalents are held in safekeeping by large, creditworthy financial institutions. Historically Viavi
utilized foreign currency forward contracts to reduce foreign exchange exposures on our behalf. These foreign currency derivative instruments could potentially
expose us to credit risk to the extent the counterparties may be unable to meet the terms of the agreements. Such risk could be mitigated but not eliminated by
limiting our counterparties to major financial institutions and by spreading such risk across several major financial institutions. We perform credit evaluations of
our customers' financial condition and generally do not require collateral from our customers.
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
These evaluations require significant judgment and are based on a variety of factors including, but not limited to, current economic trends, payment history, bad
debt write-off experience, and financial review of the customer.
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. When we
become aware that a specific customer is unable to meet their financial obligations, we record a specific allowance to reflect the level of credit risk in the
customer's outstanding receivable balance. In addition, we record additional allowances based on certain percentages of aged receivable balances. These
percentages take into account a variety of factors including, but not limited to, current economic trends, payment history and bad debt write-off experience. We
classify bad debt expenses as selling, general and administrative ("SG&A") expense.
We have significant trade receivables concentrated in the telecommunications industry. While our allowance for doubtful accounts balance is based on
historical loss experience along with anticipated economic trends, unanticipated financial instability in the telecommunications industry could lead to higher than
anticipated losses.
During fiscal 2015 , 2014 and 2013 , several customers generated more than 10% of total net revenue. Refer to "Note 13. Operating Segments and
Geographic Information" for more information.
As of June 27, 2015 and June 28, 2014 , no customers represented greater than 10% of our total accounts receivable, net.
We rely on a limited number of suppliers for a number of key components contained in our products. We also rely on a limited number of significant
independent contract manufacturers for the production of certain key components and subassemblies contained in our products.
We generally use a rolling twelve month forecast based on anticipated product orders, customer forecasts, product order history and backlog to determine our
materials requirements. Lead times for the parts and components that we order vary significantly and depend on factors such as the specific supplier, contract terms
and demand for a component at a given time. If the forecast does not meet or if it exceeds actual demand, we may have excess or shortfalls of some materials and
components, as well as excess inventory purchase commitments. We could experience reduced or delayed product shipments or incur additional inventory write-
downs and cancellation charges or penalties, which would increase costs and could have a material adverse impact on our results of operations.
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated
into U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of
accumulated other comprehensive income, within the combined statements of invested equity. Income and expense accounts are translated at the prior month
balance sheet exchange rates, which are deemed to approximate average monthly rate. Gains and losses from re-measurement of monetary assets and liabilities
denominated in currencies other than the respective functional currencies are included in the combined statements of operations as a component of interest and
other income (expense), net. Net gains or (losses) resulting from foreign currency transactions, including hedging gains and losses that are allocated to us by Viavi,
are reported in interest and other income (expense), net and was $(0.3) million , $1.6 million and $1.1 million during fiscal 2015 , 2014 and 2013 , respectively.
Revenue Recognition
We recognize revenue when all four revenue recognition criteria have been met: (i) persuasive evidence of an arrangement exists, (ii) the product has been
delivered or the service has been rendered, (iii) the price is fixed or determinable and (iv) collection is reasonably assured. Revenue from product sales is recorded
when all of the foregoing conditions are met and risk of loss and title passes to the customer. Our products typically include a warranty and the estimated cost of
product warranty claims, based on historical experience, is recorded at the time the sale is recognized. Sales to customers are generally not subject to any price
protection or return rights.
The majority of our sales are made to original equipment manufacturers ("OEM"), distributors, resellers and end-users and do not require installation of the
products by our business and are not subject to other post-delivery obligations. Our sales to distributors, resellers and end-user customers typically do not have
customer acceptance provisions.
Warranty
We provide reserves for the estimated costs of product warranties at the time revenue is recognized. We estimate the costs of our warranty obligations based
on our historical experience of known product failure rates, use of materials to repair or replace
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
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.
Shipping and Handling Costs
We record costs related to shipping and handling of revenue in cost of sales for all periods presented.
Research and Development ("R&D") Expense
Costs related to R&D, which primarily consists of labor and benefits, supplies, facilities, consulting and outside service fees, are charged to expense as
incurred.
Invested Equity
This balance represents the accumulation of our net earnings over time, including stock-based compensation recorded, cash transferred to and from Viavi,
and net intercompany between us and Viavi.
Stock-Based Compensation
Our employees have historically participated in Viavi's various stock-based benefit plans, including employee stock options, restricted stock units ("RSUs")
and the employee stock purchase plan ("ESPP"). Until consummation of the distribution, we participated in Viavi's stock-based compensation plans and record
stock-based compensation based on the equity awards granted to our employees as well as an allocation of expenses from Viavi's employees in corporate and
shared services function.
Stock-based compensation is measured at grant date, based on the fair value of the award, and recognized as compensation over the requisite service period.
The fair value of the time-based RSUs was based on the closing market price of JDSU common stock on the grant date of the award before the Separation. We use
the Monte Carlo simulation to estimate the fair value of RSUs with market conditions ("MSUs"). We estimate the fair value of ESPP using the Black-Scholes
Merton option-pricing model. These valuation models require the input of highly subjective assumptions, including the award's expected life, the price volatility of
the underlying stock and the average volatility of peer companies.
We estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. When estimating forfeitures, we consider historical
forfeiture experiences as well as our expectation about future terminations and workforce reduction programs. Estimated forfeiture is trued up to actual forfeiture
as the equity awards vest. The total fair value of the equity awards, net of forfeiture, is recorded on a straight-line basis over the requisite service period of the
awards, which is generally the vesting period, except for MSUs which are amortized based upon graded vesting method.
Income Taxes
We have calculated our taxes on a separate tax return basis. However, the amounts recorded are not necessarily representative of the amounts that would have
been reflected in the financial statements had we been an entity that operated independently of Viavi. Our operations in the United States have historically been
transacted within the same Viavi U.S. legal entities as the other Viavi businesses which have filed U.S. and state income tax returns on that basis. Accordingly, we
are not able to retain many of the tax attributes attributable to our business as a matter of U.S. tax law. Therefore, we have not reflected on the balance sheet
deferred tax assets and the corresponding valuation allowance related to approximately $5.8 billion of federal net operating losses, $1.0 billion of state net
operating losses, $56.3 million of federal tax credits, and $5.5 million of state tax credits related to our business but which cannot be transferred as a matter of U.S.
tax law. Some of our foreign entities have historically housed both our business and other Viavi businesses. Accordingly, we have not reflected on the balance
sheet deferred tax assets related to approximately $38.2 million of our net operating losses that have been utilized by Viavi's other businesses in those foreign
entities. We have reflected deferred tax assets related to foreign research tax incentives of approximately $6.1 million that were generated by other Viavi
businesses in those foreign entities and which will be retained by us. Also, it is possible that we will make different tax accounting elections and assertions, such as
the amount of earnings that will be permanently reinvested outside the United States following our distribution from Viavi.
In accordance with the authoritative guidance on accounting for income taxes, we recognize income taxes using an asset and liability approach. This
approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in our combined financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of the enacted
tax law and the effects of future changes in tax laws or rates are not anticipated.
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The authoritative guidance provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur based
on an evaluation of both positive and negative evidence and the relative weight of the evidence. With the exception of certain international jurisdictions, we have
determined that at this time it is more likely than not that deferred tax assets attributable to the remaining jurisdictions will not be realized, primarily due to
uncertainties related to our ability to utilize our net operating loss carryforwards before they expire. Accordingly, we have established a valuation allowance for
such deferred tax assets. If there is a change in our ability to realize our deferred tax assets for which a valuation allowance has been established, then our tax
provision may decrease in the period in which we determine that realization is more likely than not. Likewise, if we determine that it is not more likely than not
that deferred tax assets will be realized, then a valuation allowance may be established for such deferred tax assets and our tax provision may increase in the period
in which we make the determination.
The authoritative guidance on accounting for uncertainty in income taxes clarifies the accounting for uncertainty in income taxes recognized in an entity's
financial statements and prescribes the recognition threshold and measurement attributes for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Additionally, it provides guidance on recognition, classification, and disclosure of tax positions. We are subject to
income tax audits by the respective tax authorities in all of the jurisdictions in which we operate. The determination of tax liabilities in each of these jurisdictions
requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. We recognize liabilities based on our estimate of whether,
and the extent to which, additional tax liabilities are more likely than not. If we ultimately determine that the payment of such a liability is not necessary, then we
reverse the liability and recognize a tax benefit during the period in which the determination is made that the liability is no longer necessary.
The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that we make certain estimates and
judgments. Changes to these estimates or a change in judgment may have a material impact on our tax provision in a future period.
Restructuring Accrual
Costs associated with restructuring activities are recognized when they are incurred. However, in the case of leases, the expense is estimated and accrued
when the property is vacated. We recognize a liability for post-employment benefits for workforce reductions related to restructuring activities when payment is
probable and the amount is reasonably estimable. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we
believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or
reverse a portion of such provisions. In addition to the restructuring plans directly attributable to us, a portion of restructuring and related charges related to
corporate and shared services employees was allocated by Viavi to us. Refer to " Note 3. Transactions with Viavi " and " Note 9. Restructuring and Related
Charges " for more detail.
Loss Contingencies
We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of
an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss is
accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly
evaluate current information available to determine whether such accruals should be adjusted and whether new accruals are required.
Asset Retirement Obligations ("ARO")
Our ARO are legal obligations associated with the retirement of long-lived assets pertaining to leasehold improvements. These liabilities are initially
recorded at fair value and the related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the same amount as the
liability. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Subsequent to initial recognition, we record period-to-period
changes in the ARO liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows.
We derecognize ARO liabilities when the related obligations are settled. As of June 27, 2015 , the combined balance sheets included ARO of $ 0.3 million in other
current liabilities and $1.8 million in other non-current liabilities. As of June 28, 2014 , the combined balance sheets included ARO of $1.1 million in other current
liabilities and $0.9 million in other non-current liabilities.
Note 2. Recently Issued Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (“FASB”) issued guidance to change the subsequent measurement of inventory from lower of cost or
market to lower of cost and net realizable value. The guidance is effective for us in the first
57
quarter of fiscal 2018. Earlier application is permitted as of the beginning of an interim or annual reporting period. We are evaluating the impact of adopting this
new accounting guidance on our combined financial statements.
In May 2015, the FASB issued guidance to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is
measured using a net asset value per share practical expedient. The guidance is effective for us in the first quarter of fiscal 2017 and may apply to certain pension
assets. The guidance will be applied retrospectively and earlier adoption is permitted. We are evaluating the impact of adopting this new accounting guidance on
our combined financial statements.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance to provide a practical expedient that permits the entity
to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient
consistently from year to year. This guidance is effective for us in the first quarter of fiscal 2017. Prospective application is required, and early adoption is
permitted. We are evaluating the impact of adopting this new accounting guidance on our combined financial statements.
In May 2014, the FASB issued new authoritative guidance related to revenue recognition. This guidance will replace current U.S. GAAP guidance on this
topic and eliminate industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized.
The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance allows for either full retrospective adoption or
modified retrospective adoption. The FASB deferred the effective date for this guidance by one year to December 15, 2017 for annual reporting periods beginning
after that. Earlier application of this guidance is permitted but not before the original date of December 15, 2016. We are evaluating the impact that this new
accounting guidance will have on our combined financial statements and the related disclosures.
Note 3. Transactions with Viavi
Intercompany Transactions
During the periods covered in the combined financial statements we sold finished goods to and purchased products and services from Viavi. The amounts of
these transactions, which are reflected in the combined financial statements, are not material.
Allocated Costs
The combined statements of operations includes our direct expenses for cost of sales, R&D, sales and marketing, and administration as well as allocations of
expenses arising from shared services and infrastructure provided by Viavi to us. These allocated expenses include costs of information technology, human
resources, accounting, legal, real estate and facilities, corporate marketing, insurance, treasury and other corporate and infrastructure services. In addition, other
costs allocated to us include restructuring and stock-based compensation related to Viavi's corporate and shared services employees and are included in the table
below. These expenses are allocated to us using estimates that we consider to be a reasonable reflection of the utilization of services provided to or benefits
received by our business. The allocation methods include revenue, headcount, square footage, actual consumption and usage of services and others.
Allocated costs included in the accompanying combined statements of operations are as follows (in millions):
Research and development
Selling, general and administrative
Restructuring and related charges
Interest and other (income) expenses, net
Interest expense
Total allocated costs
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
$
$
$
0.4 $
82.5 $
3.9
0.4
0.7
— $
63.5 $
2.3
(1.3)
0.2
87.9 $
64.7 $
—
58.2
—
(0.8)
1.0
58.4
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Agreements with Viavi
LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
We shared and operated under agreements executed by Viavi with third parties, including but not limited to purchasing, manufacturing, and freight
agreements; use of facilities owned, leased, and managed by Viavi; and software, technology and other intellectual property agreements.
Note 4. Earnings Per Share
The following table sets forth the computation of basic and diluted net (loss) income per share ( in millions, except per share data ):
Numerator:
Net (loss) income
Denominator:
Basic and diluted weighted average shares
Basic and diluted net (loss) income per share
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
$
$
(3.4) $
10.7 $
58.8
(0.06) $
58.8
0.18 $
6.5
58.8
0.11
Basic net (loss) income per share is computed by dividing net (loss) income (the numerator) by the weighted average number of common shares outstanding
(the denominator). The denominator for basic earnings per share for the periods presented is based on the number of shares of Lumentum common stock
outstanding as of August 1, 2015, the Separation date. The same number of shares was used to calculate diluted earnings per share since no Lumentum equity
awards were outstanding prior to the Separation.
Note 5. Accumulated Other Comprehensive (Loss) Income
Our accumulated other comprehensive (loss) income consists of the accumulated net unrealized gains or losses on foreign currency translation adjustments
and defined benefit obligation.
At June 27, 2015 and June 28, 2014 , balances for the components of accumulated other comprehensive income were as follows ( in millions ):
Beginning balance as of June 28, 2014
Other comprehensive loss before reclassification
Net current-period other comprehensive loss
Ending balance as of June 27, 2015
Foreign currency translation
adjustments, net of tax
Defined benefit obligation, net
of tax (1)
Total
$
$
23.0
$
(9.3)
(9.3)
13.7
$
(0.3)
$
(0.9)
(0.9)
(1.2)
$
22.7
(10.2)
(10.2)
12.5
(1) Refer to " Note 12. Employee Benefit Plans " for more information on the computation of net periodic cost for pension plans.
Note 6. Mergers and Acquisitions
Time-Bandwidth Products AG ("Time-Bandwidth")
On January 27, 2014 ("Time-Bandwidth Closing Date"), we completed the acquisition of Time-Bandwidth, a privately-held company headquartered in
Switzerland. Time-Bandwidth is a provider of high-powered and ultrafast lasers for industrial and scientific markets. We acquired all outstanding shares of Time-
Bandwidth for a purchase price consideration of $15.0 million in cash, including a holdback amount of approximately $2.3 million which had been withheld to
satisfy potential breaches of representations and warranties. During the first quarter of fiscal 2016, we released the holdback amount of $2.3 million following the
eighteen -month anniversary of the Time-Bandwidth Closing Date.
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Time-Bandwidth provides innovative high-powered and ultrafast laser technology that can rapidly and precisely process parts at high volumes during the
manufacturing process. Use of ultrafast lasers for micromachining applications is being driven primarily by increasing use of consumer electronics and connected
devices globally. Manufacturers are taking advantage of high-power and ultrafast lasers to create quality micro parts for consumer electronics and to process
semiconductor chips for consumer devices. Time-Bandwidth's technology complements our current laser portfolio, while enabling Time-Bandwidth to use
Lumentum's high volume and low-cost manufacturing model, global sales team and channel relationships. Time-Bandwidth was integrated into our Commercial
Lasers ("Lasers") segment.
We accounted for the transaction in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets
acquired and liabilities assumed were recorded at fair value on the acquisition date.
The purchase price was allocated as follows ( in millions ):
Net tangible assets acquired
Intangible assets acquired:
Developed technology
Customer relationships
Goodwill
Total purchase price
$
$
The following table summarizes the components of the net tangible assets acquired at fair value ( in millions ):
Accounts receivable
Inventories
Property and equipment
Accounts payable
Accrued expenses and other liabilities, net of other assets
Deferred tax liabilities, net
Net tangible assets acquired
$
$
2.0
6.7
0.5
5.8
15.0
1.4
5.0
1.5
(0.6)
(3.5)
(1.8)
2.0
Acquired intangible assets are classified as Level 3 assets for which fair value is derived from valuation based on inputs that are unobservable and significant
to the overall fair value measurement. The fair value of acquired developed technology and customer relationships was determined based on an income approach
using the discounted cash flow method. The acquired developed technology and customer relationships are being amortized over their estimated useful lives of
eight and three years, respectively.
The goodwill arising from this acquisition is primarily attributed to sales of future products and services and the assembled workforce of Time-Bandwidth.
Goodwill has been assigned to the Lasers segment and is not deductible for tax purposes. Goodwill is not amortized, but reviewed annually for impairment or more
frequently if impairment indicators arise.
Time-Bandwidth's results of operations have been included in our combined financial statements subsequent to the date of acquisition.
Note 7. Balance Sheet and Other Details
Accounts receivable allowances
As of June 27, 2015 , our accounts receivable allowance was $1.2 million . Our accounts receivable allowance balance as of June 28, 2014 was $0.1 million .
Inventories
The components of inventories were as follows ( in millions ):
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Finished goods
Work in process
Raw materials and purchased parts
Inventories
Prepayments and other current assets
The components of prepayments and other current assets were as follows ( in millions ):
Prepayments
Advances to contract manufacturers
Other current assets
Prepayments and other current assets
Property, plant and equipment, net
The components of property, plant and equipment, net were as follows ( in millions ):
Land
Buildings and improvement
Machinery and equipment
Furniture and fixtures and software
Leasehold improvements
Construction in progress
Less: Accumulated depreciation
Property, plant and equipment, net
Years Ended
June 27, 2015
June 28, 2014
60.1 $
23.4
16.2
99.7 $
50.6
31.2
14.7
96.5
Years Ended
June 27, 2015
June 28, 2014
20.4 $
9.5
16.2
46.1 $
15.4
8.6
9.1
33.1
$
$
$
$
Years Ended
June 27, 2015
June 28, 2014
$
5.9 $
28.6
326.4
8.0
20.5
26.8
416.2
(273.0)
$
143.2 $
5.9
28.1
299.4
8.2
20.0
16.1
377.7
(241.2)
136.5
During fiscal 2015 , 2014 and 2013 , we recorded depreciation expense of $43.0 million , $35.5 million and $33.6 million , respectively.
Other current liabilities
The components of other current liabilities were as follows (in millions) :
Warranty accrual
Restructuring accrual
VAT liabilities
Years Ended
June 27, 2015
June 28, 2014
$
2.8 $
3.2
0.2
2.7
2.2
2.8
Other
Other current liabilities
$
5.2
11.4 $
3.8
11.5
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Other non-current liabilities
The components of other non-current liabilities were as follows ( in millions ):
Long-term taxes payable
Pension accrual
Asset retirement obligation
Deferred rent
Severance accrual
Other
Other non-current liabilities
Years Ended
June 27, 2015
June 28, 2014
0.1 $
2.1
1.8
1.7
1.7
2.4
9.8 $
8.9
1.6
0.9
2.3
—
5.9
19.6
$
$
Interest and other income (expense), net
The components of interest and other income (expense), net were as follows ( in millions ):
Foreign exchange gains (losses), net
Other income (expense), net
Interest and other income (expense), net
Note 8. Goodwill and Other Intangible Assets
Goodwill
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
$
$
(0.3) $
(0.1)
(0.4) $
1.6 $
(0.3)
1.3 $
1.1
(0.3)
0.8
The following table presents the changes in goodwill allocated to the reportable segments ( in millions) :
Balance as of June 29, 2013
Goodwill from Time-Bandwidth acquisition (1)
Currency translation and other adjustments
Balance as of June 28, 2014
Currency translation and other adjustments
Balance as of June 27, 2015
(1) Refer to “ Note 6. Mergers and Acquisitions ” for more information.
Impairment of Goodwill
Optical Communications
$
— $
—
—
— $
—
— $
$
$
Commercial Lasers
Total
— $
5.8
0.1
5.9
(0.3)
$
5.6
$
—
5.8
0.1
5.9
(0.3)
5.6
We reviewed goodwill for impairment annually during the fourth quarter of the fiscal year or more frequently if events or circumstances indicate that an
impairment loss may have occurred. No triggering events were noted during the interim periods fiscal 2015 or 2014 and thus, we reviewed goodwill for
impairment during the fourth quarter of each fiscal year. We determined that, based on our organizational structure and the financial information that is provided to
and reviewed by Management for the year ended fiscal 2015, our reporting units are: Optical Communications and Commercial Lasers. We had no goodwill as of
or during the fiscal year ended June 29, 2013.
Fiscal 2015
62
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
We performed the qualitative assessment and concluded that it was more likely than not that the fair value of the reporting unit that currently has goodwill
recorded exceeded its carrying amount. In assessing the qualitative factors, we considered the impact of these key factors including: change in industry and
competitive environment, market capitalization, earnings multiples, budgeted-to-actual operating performance from prior year, and consolidated company stock
price and performance. As such, we were not required to perform the two-step goodwill impairment test and recorded no impairment charge in accordance with its
annual impairment test.
Fiscal 2014
We reviewed goodwill under the two-step quantitative goodwill impairment test. Under the first step of the authoritative guidance for impairment testing, the
fair value of our Lasers reporting unit was determined based on the market approach, which estimates the fair value based on comparable market prices. Based on
the first step of the analysis, we determined that the fair value of Lasers reporting unit is significantly above its carrying amount. As such, we were not required to
perform step two of the analysis. We recorded no impairment charge in accordance with our annual impairment test.
Acquired Developed Technology and Other Intangibles
The following tables present details of our acquired developed technology and other intangibles ( in millions ):
As of June 27, 2015
Acquired developed technology
Other
Total Intangibles
As of June 28, 2014
Acquired developed technology
Other
Total Intangibles
Gross Carrying Amount
Accumulated Amortization
Net
103.2 $
9.4
112.6 $
(82.2)
$
(8.6)
(90.8)
$
Gross Carrying Amount
Accumulated Amortization
Net
105.3 $
9.7
115.0
$
(76.4)
$
(8.7)
(85.1)
$
$
$
$
$
21.0
0.8
21.8
28.9
1.0
29.9
During fiscal 2015 , 2014 and 2013 , we recorded $8.0 million , $9.3 million and $12.4 million , respectively, of amortization related to acquired developed
technology and other intangibles. The following table presents details of our amortization (in millions):
Cost of sales
Operating expense
Total
June 27, 2015
Years Ended
June 28, 2014
June 29, 2013
$
$
7.6 $
0.4
8.0 $
9.0 $
0.3
9.3 $
12.2
0.2
12.4
Based on the carrying amount of acquired developed technology and other intangibles as of June 27, 2015 , and assuming no future impairment of the
underlying assets, the estimated future amortization is as follows (in millions):
Fiscal Years
2016
2017
2018
2019
Thereafter
Total amortization
$
$
7.1
6.7
2.8
2.6
2.6
21.8
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Note 9. 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 the market conditions. As of June 27, 2015 and June 28, 2014 , our total restructuring accrual was $4.9 million and
$2.2 million , respectively. During fiscal 2015 , 2014 and 2013 , we recorded $11.6 million , $4.8 million and $2.6 million , respectively, in restructuring and
related charges in the combined statements of operations. Of the $11.6 million charge recorded during fiscal 2015 , $3.9 million related to costs allocated to us by
Viavi for plans impacting Viavi's corporate and shared services employees. Of the $4.8 million charge recorded during fiscal 2014 , $2.3 million related to costs
allocated to us by Viavi for plans impacting Viavi's corporate and shared services employees. There were no plans impacting Viavi's corporate and shared services
employees in fiscal 2013 which required restructuring and related charges to be allocated to us by Viavi. Our restructuring charges include severance and benefit
costs to eliminate a specified number of positions, facilities and equipment costs to vacate facilities and consolidate operations, and lease termination costs. The
timing of associated cash payments is dependent upon the type of restructuring charge and can extend over multiple periods.
Summary of Restructuring Plans
The adjustments to the accrued restructuring expenses related to all of our restructuring plans described below for the year ended June 27, 2015 , were as
follows (in millions):
Fiscal 2015 Plans
Separation Restructuring Plan (Workforce Reduction)
Robbinsville Closure Plan:
Workforce Reduction
Lease Costs
Transfer Costs
Total Robbinsville Closure Plan
Fiscal 2014 Plans
Serangoon Closure Plan:
Workforce Reduction
Lease Costs
Total Serangoon Closure Plan
Fiscal 2013 Plans
Other Plans
Total
Balance June 28,
2014
Fiscal Year 2015
Charges
Cash Settlements
Balance June 27,
2015
—
—
—
—
—
1.7
—
1.7
0.5
2.2
5.1
1.5
0.1
0.1
1.7
0.1
0.3
0.4
0.5
7.7
(0.5)
(1.5)
(0.1)
(0.1)
(1.7)
(1.8)
(0.3)
(2.1)
(0.7)
(5.0)
4.6
—
—
—
—
—
—
—
0.3
4.9
As of June 27, 2015 , $1.7 million of our restructuring liability was long-term in nature and included as a component of Other non-current liabilities, with the
remaining short-term portion included as a component of Other current liabilities on the combined balance sheets. As of June 28, 2014 , our restructuring liability
was short-term in nature and included as a component of Other current liabilities on the combined balance sheets.
Fiscal 2015 Plans
Separation Restructuring Plan
During the second and fourth quarter of fiscal 2015, management approved restructuring plans impacting our Optical Communications ("OpComms")
segment to optimize operations and gain efficiencies by closing the Bloomfield, Connecticut site and consolidating roles and responsibilities across functions as we
move forward with our separation plan. As a result, a restructuring charge of $5.1 million was recorded for severance and employee benefits during fiscal 2015. In
total approximately 200 employees in manufacturing, R&D and SG&A functions located in North America, Europe and Asia were impacted. Payments related to
the remaining severance and benefits accrual are expected to be paid by the end of the second quarter of fiscal 2017. We expect to accrue $1.5 million of retention
payments in the first quarter of fiscal 2016.
Robbinsville Closure Plan
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
During the first quarter of fiscal 2015, management approved a plan impacting our OpComms segment to optimize operations and gain efficiencies by
closing the Robbinsville, New Jersey site and consolidating roles and responsibilities across North America. As a result, a restructuring charge of $1.5 million was
recorded for severance and benefits during fiscal 2015. In total approximately 30 employees in manufacturing, R&D and SG&A functions located in North
America were impacted.
Fiscal 2014 Plans
Serangoon Closure Plan
During the fourth quarter of fiscal 2014, management approved a plan impacting our OpComms segment to close the Serangoon office located in Singapore
and move to a lower cost region in order to reduce manufacturing and R&D expenses. As a result, approximately 40 employees primarily in manufacturing and
R&D functions were impacted. Payments related to the remaining severance and benefits accrual were paid by the end of the fourth quarter of fiscal 2015.
Ottawa Lease Exit Costs
During fiscal 2008, we recorded lease exit charges, net of assumed sub-lease income related to our Ottawa facility which was included in SG&A expenses as
the space was never occupied and we had no need for the space in the foreseeable future due to changes in business requirements. The fair value of the remaining
contractual obligations, net of sublease income is $1.1 million and $3.1 million as of June 27, 2015 and June 28, 2014, respectively. We included the long-term
portion of the contract obligations of $0.5 million and $2.0 million in other non-current liabilities as of each period end, and the short-term portion in other current
liabilities on the combined balance sheets, respectively. In the third quarter of fiscal 2015, we released $0.9 million of accrued lease exit charges for reusing certain
spaces of our Ottawa facility. During fiscal 2015, we recorded $0.7 million benefit in the SG&A charges, plus we had cash settlements of $1.0 million and other
non-cash benefits of $0.3 million . The payments related to these lease costs are expected to be paid by the end of the third quarter of fiscal 2018.
Note 10. Income Taxes
Our income before income taxes consisted of the following ( in millions ):
Domestic
Foreign
Income before income taxes
Our income tax (benefit) expense consisted of the following ( in millions ):
Federal:
Current
State:
Current
Foreign:
Current
Deferred
$
$
$
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
(58.7) $
34.2
(24.5) $
(0.3) $
10.1
9.8 $
(3.7)
7.4
3.7
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
— $
—
(0.2) $
(0.2)
0.1
0.1
(20.3)
(0.9)
(21.2)
—
—
2.3
(3.0)
(0.7)
—
—
—
—
2.5
(5.3)
(2.8)
(2.8)
Total income tax (benefit) expense
$
(21.1) $
(0.9) $
The foreign current expense primarily relates to our profitable operations in certain foreign jurisdictions and for the year ended June 27, 2015 offset by a
$21.8 million tax benefit recognized upon the settlement of an audit in a non-U.S. jurisdiction.
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The foreign deferred tax benefit primarily relates to the recognition of research and development tax credits and similar incentives in profitable foreign
jurisdictions.
There was no material tax benefit associated with exercise of stock options for the fiscal years ended June 27, 2015 , June 28, 2014 and June 29, 2013 .
A reconciliation of our income tax expense (benefit) at the federal statutory rate to the income tax (benefit) expense at the effective tax rate is as follows ( in
millions ):
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
Income tax (benefit) expense computed at federal statutory rate
$
(8.6) $
3.4 $
Foreign rate differential
Valuation allowance
Reversal of previously accrued taxes
Research and experimentation benefits and other tax credits
Permanent items
Unrecognized tax benefits
Other
0.2
(2.2)
(21.8)
(3.1)
13.2
1.0
0.2
—
(2.4)
(0.3)
(4.4)
1.9
0.9
—
Total income tax (benefit) expense
$
(21.1) $
(0.9) $
The components of our net deferred taxes consisted of the following ( in millions ):
1.3
0.2
(3.7)
(0.1)
(3.7)
1.6
1.2
0.4
(2.8)
Gross deferred tax assets:
Tax credit carryforwards
Net operating loss carryforwards
Inventories
Accruals and reserves
Fixed assets
Capital loss carryforwards
Unclaimed research and experimental development expenditure
Other
Acquisition-related items
Gross deferred tax assets
Valuation allowance
Deferred tax assets
Gross deferred tax liabilities:
Acquisition-related items
Undistributed foreign earnings
Other
Deferred tax liabilities
Total net deferred tax assets
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
41.6
61.0
7.7
4.1
21.7
12.4
16.7
5.4
29.4
200.0
(160.0)
40.0
(6.7)
(2.6)
(1.2)
(10.5)
29.5
33.8
91.4
6.7
4.2
24.2
14.3
15.5
7.0
32.6
229.7
(184.6)
45.1
(9.4)
(2.4)
(0.9)
(12.7)
32.4
30.2
99.9
5.8
4.1
26.7
14.7
12.2
7.5
60.6
261.7
(215.3)
46.4
(11.2)
(3.2)
—
(14.4)
32.0
As of June 27, 2015 , we had federal and foreign tax net operating loss carryforwards of approximately $114.8 million and $82.1 million , respectively, and
state and foreign research and other tax credit carryforwards of approximately $0.3 million and $41.2 million , respectively. Our policy is to account for the
utilization of tax attributes under a with-and-without approach. The tax net operating loss and tax credit carryforwards will start to expire in 2015 and at various
other dates through 2027 if not utilized. Utilization of the tax net operating losses may be subject to a substantial annual limitation due to the ownership change
limitations
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
provided by the Internal Revenue Code and similar state and foreign provisions. Loss carryforward limitations may result in the expiration or reduced utilization of
a portion of our net operating losses.
U.S. income and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries have not been provided on $2.2 million of
undistributed earnings for certain foreign subsidiaries. We intend to reinvest these earnings indefinitely outside of the United States. We estimate that an additional
$0.2 million of U.S. income or foreign withholding taxes would have to be provided if these earnings were repatriated back to the U.S.
The valuation allowance decreased by $24.6 million in fiscal 2015 , decreased by $30.6 million in fiscal 2014 , and decreased by $40.1 million in fiscal 2013
. The decrease during fiscal 2015 was primarily related to the utilization of foreign net operating losses and the amortization of intangibles. The decrease during
fiscal 2014 and 2013 was primarily related to the amortization of intangibles and the amortization of tax deductible goodwill.
A reconciliation of unrecognized tax benefits between June 30, 2012 and June 27, 2015 is as follows ( in millions ):
Balance at June 30, 2012
Reductions due to foreign currency rate fluctuation
Reductions based on ITC expiration
Balance at June 29, 2013
Reductions due to foreign currency rate fluctuation
Balance at June 28, 2014
Reductions based on the tax positions related to the prior year
Additions based on tax positions related to current year
Balance at June 27, 2015
$
$
$
25.3
(0.5)
(2.4)
22.4
(0.5)
21.9
(21.8)
0.1
0.2
The liabilities for unrecognized tax benefits relate primarily to the allocations of revenue and costs among our global operations and the validity of some non-
U.S. net operating losses. In addition, utilization of our tax net operating losses may be subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar state and foreign provisions. As a result, loss carryforward limitations may result in the expiration or
reduced utilization of a portion of our net operating losses.
Included in the balance of unrecognized tax benefits at June 27, 2015 are $0.1 million of tax benefits that, if recognized, would result in adjustments to the
valuation allowance. Also included in the balance of unrecognized tax benefits at June 27, 2015 are $0.1 million of tax benefits that, if recognized, would impact
the effective tax rate.
Our policy is to recognize accrued interest and penalties related to unrecognized tax benefits within the income tax provision. The amount of interest and
penalties accrued as of June 27, 2015 and June 28, 2014 was less than $0.1 million and $23.3 million , respectively. During fiscal 2015 , accrued interest and
penalties decreased by $23.2 million primarily relating to the settlement of an audit in a non-U.S. jurisdiction.
We are routinely subject to various federal, state and foreign audits by taxing authorities. We believe that adequate amounts have been provided for any
adjustments that may result from these examinations.
The following table summarizes our major tax jurisdictions and the tax years that remain subject to examination by such jurisdictions as of June 27, 2015 :
Tax Jurisdictions
United States
Canada
China
Japan
Tax Years
2011 and onward
2008 and onward
2010 and onward
2011 and onward
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Note 11. Stock-Based Compensation
Viavi maintained various stock-based compensation plans including employee stock options, RSUs and the ESPP. We participated in Viavi's stock-based
benefit plans and recorded stock-based compensation based on the equity awards granted to our employees as well as an allocation of Viavi's corporate employee
expenses. Accordingly, the amounts presented are not necessarily indicative of future expenses and do not necessarily reflect the results that we would have
experienced as an independent publicly traded company for the periods presented.
Description of Viavi Stock-Based Benefit Plans
Stock Option Plans
As of June 27, 2015 , Viavi had 11.3 million shares of stock options and RSUs issued and outstanding to employees and directors under 2005 Acquisition
Equity Incentive Plan (the "2005 Plan"), Amended and Restated 2003 Equity Incentive Plan (the "2003 Plan") and various other plans Viavi assumed through
acquisitions. The exercise price for stock options is equal to the fair value of the underlying stock at the date of grant. Viavi issues new shares of common stock
upon exercise of stock options. Options generally become exercisable over a three -year or four -year period and, if not exercised, expire from five to ten years
after the date of grant.
On December 11, 2014, Viavi's stockholders approved an amendment to the 2003 Plan to increase the number of shares that may be issued under the plan by
9 million shares.
As of June 27, 2015 , 10.8 million shares of common stock, primarily under the 2003 Plan and the 2005 Plan, were available for grant.
Employee Stock Purchase Plan
In June 1998, Viavi adopted the JDS Uniphase Corporation 1998 Employee Stock Purchase Plan, as amended (the "1998 Purchase Plan"). The 1998 Purchase
Plan, which became effective August 1, 1998, provides eligible employees with the opportunity to acquire an ownership interest in Viavi through periodic payroll
deductions and provides a discounted purchase price as well as a look-back period. The 1998 Purchase Plan is structured as a qualified employee stock purchase
plan under Section 423 of the Internal Revenue Code of 1986. However, the 1998 Purchase Plan is not intended to be a qualified pension, profit sharing or stock
bonus plan under Section 401(a) of the Internal Revenue Code of 1986 and is not subject to the provisions of the Employee Retirement Income Security Act of
1974. The 1998 Purchase Plan will terminate upon the earlier of August 1, 2018 or the date on which all shares available for issuance have been sold. Of the 50.0
million shares authorized under the 1998 Purchase Plan, 3.2 million shares remained available for issuance as of June 27, 2015 . The 1998 Purchase Plan provides
a 5% discount and a six month look-back period.
Restricted Stock Units
RSUs are granted with the exercise price equal to zero and converted to shares immediately upon vesting. These RSUs have service conditions, market
conditions, or a combination of both and are expected to vest over one to four years. The fair value of the time-based RSUs was based on the closing market price
of the common stock on the date of award. The fair value of MSUs is estimated using a Monte Carlo simulation.
Stock-Based Compensation
The impact on our results of operations of recording stock-based compensation by function for fiscal 2015 , 2014 and 2013 was as follows (in millions) :
Cost of sales
Research and development
Selling, general and administrative
June 27, 2015
Years Ended
June 28, 2014
June 29, 2013
5.1
7.3
14.7
27.1
5.6
7.3
12.9
25.8
5.5
6.1
11.2
22.8
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Approximately $1.0 million of stock-based compensation was capitalized to inventory at June 27, 2015 . The table above includes allocated stock-based
compensation from Viavi of $8.9 million , $7.3 million and $6.5 million for fiscal 2015 , 2014 and 2013 , respectively. Refer to "Note 3. Transactions with Viavi"
for more information.
Stock Option Activity
Viavi granted no stock options during fiscal 2015 , 2014 and 2013 . The total intrinsic value of options exercised by our employees during the year ended
June 27, 2015 was $1.7 million . In connection with these exercises, the tax benefit realized by us was immaterial due to the fact that Viavi has no material tax
benefit in foreign jurisdictions and a full valuation allowance on its domestic deferred tax assets.
The following table summarizes our stock options activities in fiscal 2015 (amount in millions except per share amounts) :
Balance as of June 28, 2014
Exercised
Balance as of June 27, 2015
Options Outstanding
Number of Shares
Weighted-Average Exercise
Price
1.2
(0.4)
0.8
9.97
8.56
10.37
The following table summarizes significant ranges of our outstanding and exercisable options as of June 27, 2015 :
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life
(in
years)
Weighted
Average
Exercise Price
Aggregate
Intrinsic Value
(in
millions)
Number
of Shares
Weighted
Average
Remaining
Contractual
Life
(in
years)
Weighted
Average
Exercise Price
Aggregate
Intrinsic Value
(in
millions)
2.0 $
5.20 $
3.0
3.6
2.7
10.46
25.05
10.37 $
2.2
0.6
—
2.8
326,944
397,503
112,500
836,947
2.0 $
5.20 $
3.0
3.6
2.7
10.46
25.05
10.37 $
2.2
0.6
—
2.8
Range of
Exercise Prices
$0.00 - 10.00
10.01 - 20.00
20.01 - 30.00
Number
of Shares
326,944
397,503
112,500
836,947
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on JDSU's closing stock price of $12.01 as of June 27, 2015
, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options
exercisable as of June 27, 2015 was 0.7 million .
Employee Stock Purchase Plan Activity
The compensation expense we recorded in connection with Viavi's ESPP for the year ended June 27, 2015 was $0.7 million . The expense related to the plan
is recorded on a straight-line basis over the relevant subscription period.
The following table summarizes the shares issued to our employees and the fair market value at purchase date, during the year ended June 27, 2015 :
Purchase Date
Shares Issued
Fair market value at purchase date
$
May 29, 2015
January 30, 2015
July 31, 2014
149,330
12.82 $
250,666
12.15 $
221,998
11.87
Restricted Stock Units Activity
During fiscal 2015, 2014 and 2013, 1.8 million , 1.9 million and 1.7 million RSUs were granted to our employees, respectively. As of June 27, 2015 , $22.5
million of unrecognized stock-based compensation cost related to RSUs granted to our employees remains to be amortized. That cost is expected to be recognized
over an estimated amortization period of 2.0 years.
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
A summary of the status of our non-vested RSUs as of June 27, 2015 and changes during fiscal 2015 is presented below (amount in millions, except per share
amounts) :
Performance-based
shares with market
conditions
Time-based shares
Total number of shares
Full Value Awards
Non-vested at June 28, 2014
Awards granted
Awards vested
Awards forfeited
Non-vested at June 27, 2015
0.3
0.2
(0.1)
(0.1)
0.3
2.7
1.6
(1.4)
(0.4)
2.5
Weighted-average
grant-dated fair value
13.11
3.0 $
1.8
(1.5)
(0.5)
2.8 $
11.70
13.11
12.18
12.38
During fiscal 2015 , 2014 and 2013 , 0.2 million , 0.2 million and 0.1 million MSUs were granted to our employees, respectively. These MSUs shares
represent the target amount of grants and the actual number of shares awarded upon vesting of the MSUs may be higher or lower depending upon the achievement
of the relevant market conditions. The majority of MSUs vest in equal annual installments over three years based on the attainment of certain total stockholder
return performance measures and the employee's continued service through the vest date. The aggregate grant-date fair value of MSUs granted to our employees
during fiscal 2015 , 2014 and 2013 was estimated to be $2.2 million , $2.1 million and $1.8 million , respectively, and was calculated using a Monte Carlo
simulation.
Valuation Assumptions
We estimate the fair value of the MSUs on the date of grant using a Monte Carlo simulation with the following assumptions:
Volatility of common stock
Average volatility
Average correlation coefficient
Risk-free interest rate
Note 12. Employee Benefit Plans
Employee 401(k) Plans
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
40.8%
53.4%
0.2156
0.6%
53.9%
58.6%
0.2920
0.8%
57.5%
58.3%
0.3208
0.4%
Eligible employees participated in the JDS Uniphase Corporation Employee 401(k) Retirement Plan (the "401(k) Plan"), a Defined Contribution Plan under
ERISA, which provides retirement benefits for its eligible employees through tax deferred salary deduction. The 401(k) Plan allows employees to contribute up to
50% of their annual compensation, with contributions limited to $18,000 in calendar year 2015 as set by the Internal Revenue Service.
For all eligible participants who have completed 180 days of service with us, the 401(k) Plan provided for a 100% match of employees' contributions up to
the first 3% of annual compensation and 50% match on the next 2% of compensation. All matching contributions are made in cash and vest immediately. Viavi
made matching contributions on our behalf to the 401(k) Plan in the amount of $2.6 million , $2.5 million and $2.3 million in fiscal 2015, 2014 and 2013,
respectively.
Employee Defined Benefit Plans
During the third quarter of fiscal 2014, we assumed a defined benefit plan in connection with the acquisition of Time-Bandwidth. Prior to the third quarter of
fiscal 2014, we did not have any significant defined benefit plans. This plan, which covers certain Swiss employees, is open to new participants and additional
service costs are being accrued. Benefits are generally based upon age and compensation. As of June 27, 2015 , the plan was partially funded. Our policy for
partially funded plans is to make contributions equal to or greater than the requirements prescribed by law or regulation. Future estimated benefit payments are
summarized below. No other required contributions to this defined benefit plan are expected in fiscal 2016, but we can, at our discretion, make contributions to the
plan.
We account for our obligations under this pension plan in accordance with the authoritative guidance which requires us to record our obligation to the
participants, as well as the corresponding net periodic cost. We determine our obligation to the
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
participants and our net periodic cost principally using actuarial valuations provided by third-party actuaries. The net obligation of $2.1 million as of June 27, 2015
is recorded in our combined balance sheets as non-current liabilities and is reflective of the total PBO less the fair value of plan assets.
The change in the benefit obligations and plan assets of the pension and benefits plan were as follows (in millions):
Change in benefit obligation:
Benefit obligation at beginning of year
Acquisitions
Service cost
Interest cost
Plan participants' contribution
Actuarial (gains)/losses
Benefits paid
Foreign exchange impact
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Acquisitions
Actual return on plan assets
Employer contribution
Plan participants' contribution
Benefits paid
Foreign exchange impact
Fair value of plan assets at end of year
Funded status
Accumulated benefit obligation
Pension Benefit Plans
2015
2014
$
4.6 $
—
0.3
0.1
0.3
1.2
0.4
(0.2)
6.7 $
3.0 $
—
0.2
0.8
0.3
0.4
(0.1)
4.6 $
(2.1) $
5.6 $
$
$
$
$
$
—
3.8
0.1
—
0.1
0.4
0.2
—
4.6
—
2.7
0.1
(0.1)
0.1
0.2
—
3.0
(1.6)
3.7
Assumptions
Underlying both the calculation of the PBO and net periodic cost are actuarial valuations. These valuations use participant-specific information such as
salary, age and assumptions about interest rates, compensation increases and other factors. At a minimum, we evaluate these assumptions annually and make
changes as necessary.
The discount rate reflects the estimated rate at which the pension benefits could be effectively settled. In developing the discount rate, we consider the yield
available on an appropriate AA corporate bond index, adjusted to reflect the term of the scheme's liabilities.
The expected return on assets was estimated by using the weighted average of the real expected long-term return (net of inflation) on the relevant classes of
assets based on the target asset mix and adding the chosen inflation assumption.
The following table summarizes the assumptions used to determine net periodic cost and benefit obligation for the pension plan:
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Assumptions used to determine net periodic cost:
Discount rate
Expected long-term return on plan assets
Rate of pension increase
Assumptions used to determine benefit obligation at end of year:
Discount rate
Rate of pension increase
Fair Value Measurement of Plan Assets
Pension Benefit Plans
2015
2014
2.0%
3.2%
2.3%
1.1%
2.3%
2.4%
3.3%
2.3%
2.0%
—
The following table sets forth the plan's assets at fair value and the percentage of assets allocations as of June 27, 2015 (in millions, except percentage data ).
Assets:
Global equity
Fixed income
Cash
Other
Total Assets
Target Allocation
Total
Percentage of Plan
Asset
Fair value measurement as of June 27, 2015
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable Inputs
(Level 2)
23% $
36%
1%
40%
$
1.3
1.6
0.1
1.6
4.6
28.2% $
34.8%
2.2%
34.8%
100.0% $
— $
—
0.1
—
0.1 $
1.3
1.6
—
1.6
4.5
The following table sets forth the plan's assets at fair value and the percentage of assets allocations as of June 28, 2014 (in millions, except percentage data ).
Assets:
Global equity
Fixed income
Other
Total Assets
Target Allocation
Total
Percentage of Plan
Asset
Fair value measurement as of June 28, 2014
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable Inputs
(Level 2)
21% $
43%
36%
$
0.7
1.3
1.0
3.0
23.3% $
43.3%
33.4%
100.0% $
— $
—
—
— $
0.7
1.3
1.0
3.0
Our pension assets consist of multiple institutional funds ("pension funds") of which the fair values are based on the quoted prices of the underlying funds.
Pension funds are classified as Level 2 assets since such funds are not directly traded in active markets. Global equity consists of several funds that invest primarily
in Swiss and Foreign equities; Fixed income consists of several funds that invest primarily in investment grade domestic and overseas bonds; Other consists of
several funds that primarily invest in hedge fund, private equity, global real estate and infrastructure funds.
Future Benefit Payments
We estimate our expected benefit payments to defined benefit pension plan participants based on the same assumptions used to measure our PBO at year end
which includes benefits attributable to estimated future compensation increases. Based on this
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
approach, we expect to make payments of $0.3 million during the five year period between fiscal 2016 and fiscal 2020 and the remaining $1.8 million of payments
in fiscal years subsequent to fiscal 2020.
Note 13. Commitments and Contingencies
Operating Leases
We lease certain real and personal property from unrelated third parties under non-cancellable operating leases that expire at various dates through fiscal
2026. Certain leases require us to pay property taxes, insurance and routine maintenance, and include escalation clauses. As of June 27, 2015 the future minimum
annual lease payments under non-cancellable operating leases were as follows ( in millions ):
2016
2017
2018
2019
2020
Thereafter
Total minimum operating lease payments
$
$
6.6
6.5
5.4
3.7
2.2
5.2
29.6
Included in the future minimum lease payments table above is $1.1 million related to lease commitments in connection with our restructuring and related
activities. Refer to "Note 9. Restructuring and Related Charges" for more information.
Rental expense relating to building and equipment was $9.1 million , $10.0 million and $9.3 million in fiscal 2015 , 2014 and 2013 , respectively.
Purchase Obligations
Purchase obligations of $94.8 million as of June 27, 2015 , 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 maintains 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 component or application of our products by the end customer our warranties can
vary and generally range from six to thirty-six months. 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 periodically assess the adequacy of
our recorded warranty liabilities and adjust the amounts as necessary.
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The following table presents the changes in our warranty reserve during fiscal 2015 and fiscal 2014 ( in millions ):
Balance as of beginning of year
Provision for warranty
Utilization of reserve
Adjustments related to pre-existing warranties (including changes in estimates)
Balance as of June 27, 2015 and June 28, 2014
Environmental Liabilities
Years Ended
June 27, 2015
June 28, 2014
$
$
2.7 $
3.8
(3.4)
(0.3)
2.8 $
3.3
3.3
(2.6)
(1.3)
2.7
Our 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 regulation 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.
In connection with the Separation, we agreed to indemnify Viavi for any liability associated with contamination from past operations at all properties
transferred to us from Viavi, to the extent the resulting issues primarily related to our business.
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 aggregate, will not have a material adverse impact on our financial position, results of operations or statement of
cash flows, these matters are subject to inherent uncertainties and management's view of these matters may change in the future. Were an unfavorable final
outcome to occur, there exists the possibility of a material adverse impact on our financial position, results of operations or cash flows for the period in which the
effect becomes reasonably estimable.
Note 14. 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 are an industry leading provider of optical and photonic products addressing a range of end-market applications including optical communications and
commercial lasers. We have two operating segments, OpComms and Lasers. 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.
Our reportable segments are:
(i) OpComms: Our OpComms portfolio includes products used by Telecom and Datacom network equipment manufacturers ("NEMs") and both traditional
and cloud/data center service providers. These products enable the transmission and transport of video, audio and text data over high-capacity fiber optic
cables. Transmission products primarily consist of optical transceivers, optical transponders, and their supporting components such as modulators and
source lasers, including innovative products such as the Tunable Small Form-factor Pluggable Plus transceiver. Transport products primarily consist of
modules or sub-systems containing optical amplifiers, reconfigurable optical add/drop multiplexers ("ROADMs") or Wavelength Selective Switches,
Optical Channel Monitors and their supporting components. Our products for 3-D sensing applications, formerly referred to as our gesture recognition
products, include a light source
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
product. Customer solutions containing our 3-D sensing products let a person control electronic or computer devices with natural body or hand gestures
instead of using a remote, mouse or other device.
(ii) Lasers: Our Lasers products serve customers in markets and applications such as manufacturing, biotechnology, graphics and imaging, remote sensing,
and precision machining such as drilling in printed circuit boards, wafer singulation and solar cell scribing. These products include diode, direct-diode,
diode-pumped solid-state, fiber, and gas lasers. In addition, our photonic power products include fiber optic-based systems for delivering and measuring
electrical power.
The CODM evaluates segment performance to make financial decisions and allocate resources based on gross margin. 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 non-recurring 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) :
June 27, 2015
Years Ended
June 28, 2014
June 29, 2013
Net revenue:
OpComms
Lasers
Net revenue
Gross profit:
OpComms
Lasers
Total segment gross profit
Unallocated amounts:
Stock-based compensation
Amortization of intangibles
Other charges related to non-recurring activities
$
$
694.1 $
143.0
837.1 $
204.8
67.4
272.2
(5.1)
(7.6)
(1.6)
695.1 $
122.8
817.9 $
212.3
59.8
272.1
(5.6)
(9.0)
(0.9)
Gross profit
$
257.9 $
256.6 $
653.1
116.8
769.9
187.7
52.8
240.5
(5.5)
(12.2)
—
222.8
The table below discloses the percentage of 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 the Telecom, Datacom and consumer and industrial ("Consumer and Industrial") markets
which accounted for more than 10% of our total net revenue during the last three fiscal years:
Optical Communications:
Telecom
Datacom
Consumer and Industrial
Lasers
June 27, 2015
Years Ended
June 28, 2014
June 29, 2013
82.9%
60.6%
17.4%
4.9%
17.1%
85.0%
60.6%
14.3%
10.1%
15.0%
84.8%
66.9%
11.9%
6.0%
15.2%
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
We operate in three geographic regions: Americas, Asia-Pacific and Europe Middle East and Africa ("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, 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 exceeded 10% of our total net revenue (dollars in millions) :
Net revenue:
Americas:
United States
Mexico
Other Americas
Total Americas
Asia-Pacific:
Hong Kong
Japan
Other Asia-Pacific
Total Asia-Pacific
EMEA
Total net revenue
* Represents less than 10% of total net revenue
June 27, 2015
Years Ended
June 28, 2014
June 29, 2013
$
$
$
$
$
$
162.4
112.7
31.1
306.2
120.4
106.6
174.4
401.4
19.4% $
13.5
3.6
36.5% $
14.4% $
12.7
20.9
48.0% $
177.5
111.3
30.3
319.1
128.7
97.6
138.6
364.9
21.7% $
202.0
13.6
3.7
39.0% $
*
125.9
327.9
15.8% $
11.9
16.9
44.6% $
126.6
78.4
125.6
330.6
26.2%
*
16.4
42.6%
16.4%
10.2
16.3
42.9%
129.5
15.5% $
133.9
16.4% $
111.4
14.5%
837.1
$
817.9
$
769.9
During fiscal 2015 , 2014 and 2013 , net revenue from customers outside the United States, based on customer shipping location, represented 80.6% , 78.3%
and 73.8% of net revenue, respectively. Our net revenue is primarily denominated in U.S. dollars, including our net revenue from customers outside the United
States as presented above.
During fiscal 2015 , 2014 and 2013 , net revenue generated from a single customer which represented greater than 10% of total net revenue is summarized as
follows ( in millions ):
Ciena
Google
Cisco
*Represents less than 10% of total net revenue
76
Years Ended
June 27, 2015
June 28, 2014
June 29, 2013
$
$
120.4 $
*
98.7
130.2 $
84.6
* $
125.6
*
87.7
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LUMENTUM HOLDINGS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Long-lived assets, namely net property, plant and equipment were identified based on the operations in the corresponding geographic areas (in millions) :
Property, Plant and Equipment, net
United States
Canada
China
Thailand
Other Asia-Pacific
EMEA
Total long-lived assets
Years Ended
June 27, 2015
June 28, 2014
$
$
63.0 $
13.5
34.4
29.0
1.2
2.1
143.2 $
55.9
9.9
37.5
29.7
1.8
1.7
136.5
Note 15. Quarterly Financial Information (unaudited)
The following table presents our quarterly combined statements of operations for fiscal 2015 and 2014 ( in millions, except per share data ):
March 28,
2015
December 27,
2014
September 27,
2014
Net revenue
Cost of sales
Amortization of acquired technologies
Gross profit
Operating expenses:
Research and development
Selling, general and administrative (3)
Restructuring and related charges
Total operating expenses
June 27,
2015
208.9
143.4
1.9
63.6
35.7
37.6
4.9
78.2
198.7
139.7
1.9
57.1
35.0
31.8
1.1
67.9
(Loss) income from operations
(14.6)
(10.8)
Interest and other income (expense), net
Interest expense
(0.3)
—
(0.1)
(0.3)
(Loss) income before income taxes
(14.9)
(11.2)
(Benefit from) provisions for income
taxes (2)
Net (loss) income
0.9
(15.8)
(23.4)
12.2
210.5
141.7
1.9
66.9
35.1
31.2
3.8
70.1
(3.2)
0.1
(0.2)
(3.3)
0.8
(4.1)
219.0
146.8
1.9
70.3
35.0
28.3
1.8
65.1
5.2
(0.1)
(0.2)
4.9
0.6
4.3
June 28,
2014
201.0
135.0
2.2
63.8
36.6
30.3
3.7
70.6
(6.8)
(0.1)
(0.1)
(7.0)
(0.3)
(6.7)
March 29,
2014
December 28,
2013
September 28,
2013
201.6
135.4
2.2
64.0
33.8
26.5
—
60.3
3.7
1.1
0.3
5.1
0.3
4.8
203.6
138.3
2.3
63.0
33.0
26.0
1.2
60.2
2.8
0.3
(0.2)
2.9
(1.0)
3.9
211.7
143.6
2.3
65.8
31.5
25.4
(0.1)
56.8
9.0
—
(0.2)
8.8
0.1
8.7
Net (loss) income per share - basic and
diluted (1)
Basic and diluted average shares
outstanding (1)
$
(0.27) $
0.21 $
(0.07)
$
0.07
$
(0.11) $
0.08 $
0.06
$
0.15
58.8
58.8
58.8
58.8
58.8
58.8
58.8
58.8
(1) On August 1, 2015, JDSU distributed 47.1 million shares, or 80.1% of the outstanding shares of Lumentum common stock to existing holders of JDSU
common stock. JDSU was renamed Viavi and at the time of the distribution, retained 11.7 million shares, or 19.9% of Lumentum's outstanding shares.
Basic and diluted net (loss) income per share for all periods through June 27, 2015 is calculated using the shares of Lumentum common stock outstanding
on August 1, 2015. Refer to "Note 4. Earnings Per Share" to the audited annual combined financial statements for more detail.
77
(2) During the third quarter of fiscal 2015, we recognized a $21.8 million tax benefit upon the settlement of an audit in a non-US jurisdiction.
(3) During the fourth quarter of fiscal 2015, we identified immaterial errors relating to legal expense and stock-based compensation expense. Our Selling,
general and administrative expense and net income reported in our unaudited combined statements of operations for the nine months ended March 28,
2015 included in our Registration Statement on Form 10, as amended was understated and overstated by $1.1 million , respectively. These errors did not
impact any annual or other interim periods. The correction of these errors is reflected in our quarterly combined statements of operations presented
above. We assessed the materiality of the errors individually and in the aggregate on nine-month unaudited combined financial statements in accordance
with the SEC’s Staff Accounting Bulletin No. 99 and, based on an analysis of quantitative and qualitative factors, determined that the errors were not
material to our unaudited combined financial statements for the nine months ended March 28, 2015. Therefore, our unaudited combined financial
statements for the nine months ended March 28, 2015 can continue to be relied upon and an amendment of our previously filed Registration Statement on
Form 10 is not required. However, for comparability, we will revise our previously issued unaudited interim financial statements for the nine months
ended March 28, 2015 to correct the errors in our future Quarterly Report on Form 10-Q where these interim financial statements are included.
Note 16. Subsequent Events
Separation from JDSU
On August 1, 2015, we became an independent publicly-traded company through the distribution by JDSU to its stockholders of 80.1% of our outstanding
common stock. Each JDSU stockholder of record as of the close of business July 27, 2015 received one share of Lumentum common stock for every five shares of
JDSU common stock held on the record date. JDSU was renamed Viavi and at the time of the distribution, retained ownership of 19.9% of Lumentum’s
outstanding shares. We were incorporated in Delaware as a wholly owned subsidiary of Viavi on February 10, 2015 and are comprised of the existing
communications and commercial optical products (“CCOP”) segment and WaveReady product lines of Viavi. Our common stock began trading “regular-way”
under the ticker “LITE” on the NASDAQ stock market on August 4, 2015.
Issuance and Sale of Series A Preferred Stock
On July 31, 2015, our subsidiary, Lumentum Inc., issued 40,000 shares of its Series A Preferred Stock to Viavi. Pursuant to a securities purchase agreement
executed on May 12, 2015, Viavi sold 35,805 shares of the Series A Preferred Stock to Amada Holdings Co., Ltd. (“Amada”) for $35.8 million following the
Separation and the remaining 4,195 shares of the Series A Preferred Stock were canceled.
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Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, or the Exchange Act) required by Exchange Act Rules 13a-15(b) or 15d-15(b), our chief executive officer and our chief financial officer have concluded that
as of the end of the period covered by this report, our disclosure controls and procedures were effective.
(b) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
This Annual Report on Form 10-K does not include a report of management's assessment regarding internal control over financial reporting or an attestation
report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.
(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) that occurred during our most recently
completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers
PART III
The following table sets forth information regarding individuals who serve as our executive officers. The position titles refer to each executive officer's title
at Lumentum as of September 15, 2015.
Name
Alan Lowe
Aaron Tachibana
Vincent Retort
Craig Cocchi
Jason Reinhardt
Judy Hamel
Age
53
55
61
50
41
49
President and Chief Executive Officer
Position
Chief Financial Officer
Senior Vice President, R&D
Senior Vice President, Operations
Senior Vice President, Sales
General Counsel and Secretary
Alan
Lowe
has served as Lumentum's president and chief executive officer since July 2015. Prior to joining Lumentum, Mr. Lowe was employed by Viavi.
Mr. Lowe joined Viavi in September 2007 as senior vice president of the Lasers business, and became executive vice president and president of Viavi's CCOP
business in October 2008. Prior to joining Viavi, Mr. Lowe was senior vice president, Customer Solutions Group at Asyst Technologies, Inc. a leader in
automating semiconductor and flat panel display fabs. From 2000 to 2003, he was president and chief executive officer of Read-Rite Corporation (“Read-Rite”), a
manufacturer of thin-film recording heads for disk and tape drives. From 1989 to 2000, Mr. Lowe served in roles of increasing responsibility at Read-Rite,
including president and chief operating officer, and senior vice president of customer business units. Mr. Lowe holds Bachelor of Arts degrees in computer science
and business economics from the University of California, Santa Barbara and completed the Stanford Executive Program in 1994.
Aaron
Tachibana
has served as Lumentum's chief financial officer since July 2015. Prior to joining Lumentum, Mr. Tachibana was employed by Viavi. Mr.
Tachibana joined Viavi in November 2013 as vice president of finance and corporate controller. Prior to joining Viavi, Mr. Tachibana served as chief financial
officer at Pericom Semiconductor Corp., a supplier of performance connectivity and timing solutions, from March 2010 to October 2013 where he led finance and
human resources. From 1992 to 2010, he held executive and senior management positions with Asyst Technologies, Inc., Allied Telesis, Inc., TapCast Inc. and
TeraStor Corporation. Mr. Tachibana holds a Bachelor of Science degree in Business Administration and Finance from San Jose State University.
Vincent
Retort
has served as Lumentum's senior vice president, R&D since July 2015. Prior to joining Lumentum, Mr. Retort was employed by Viavi. Mr.
Retort joined Viavi in 2008 as vice president of research & development, CCOP, and became senior vice president of research & development of CCOP in 2011.
From 2004 to 2008, Mr. Retort was vice president of product engineering, reliability and quality at NeoPhotonics Corporation, a designer and manufacturer of
photonic integrated circuit based modules and subsystems. From 2002 to 2004, Mr. Retort served as senior director of development engineering, magnetic
recording performance at Seagate Technologies PLC, an international manufacturer and distributor of computer disk drives. From 2000 to 2002, Mr. Retort served
as vice president of product engineering at Lightwave Microsystems Corporation, a communications equipment company. Mr. Retort holds a Masters of Science
degree in Biological Sciences from Stanford University and a Bachelor of Arts degree in Biology from West Virginia University.
Craig
Cocchi
has served as Lumentum's senior vice president, operations since July 2015. Prior to joining Lumentum, Mr. Cocchi was employed by Viavi.
Mr. Cocchi joined Viavi in January 2008 as vice president of operations, Lasers, Optical Components and Telecom Equipment and became senior vice president of
operations of CCOP in May 2009. From 2005 to 2007, Mr. Cocchi served as vice president of business operations at SAE Magnetics (HK) Ltd., a hard disc drive
design and manufacturing company. From 1999 to 2003 he held senior executive positions at Read-Rite. Mr. Cocchi holds a Bachelor of Science degree in
Electrical Engineering and Sociology from the University of California, San Diego.
Jason
Reinhardt
has served as Lumentum's senior vice president, sales since July 2015. Prior to joining Lumentum, Mr. Reinhardt was employed by Viavi.
Mr. Reinhardt joined Viavi in May 2008 as Director of Sales for North America. He was subsequently promoted to Senior Director of North America Sales, VP
and Senior VP of Global Sales, holding that position from August 2010 until January 2014, after which he focused on charitable humanitarian work while holding
a part-time business development position. Mr. Reinhardt has now returned to a full-time role as of June 2015, serving again as Viavi’s Senior VP of Global Sales.
Before joining Viavi, Mr. Reinhardt served as Deputy Country Director of HOPE worldwide
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Afghanistan, Senior Director of North America Sales at Avanex Corporation and Account Manager and Production Engineer at Corning Incorporated. He also
served as an officer in the United States Air Force prior to those roles. Mr. Reinhardt holds a Bachelor of Science degree in Electrical Engineering from Montana
State University, and a Master of Business Administration degree from Babson College’s Franklin W. Olin Graduate School of Business.
Judy
Hamel
has served as Lumentum's general counsel and secretary since July 2015. Prior to joining Lumentum, Ms. Hamel was employed by Viavi. Ms.
Hamel joined Viavi in August 2012 as senior corporate counsel. Prior to joining Viavi, from September 2006 to August 2012, Ms. Hamel served as vice president
legal affairs at Cortina Systems, Inc., a global communications supplier of port connectivity solutions to the networking and telecommunications sector.
Previously, Ms. Hamel worked as a corporate associate at Silicon Valley law firms Cooley Godward LLP and Wilson Sonsini Goodrich and Rosati PC. Ms. Hamel
holds a Juris Doctor degree from Santa Clara University School of Law, a Masters degree in Business Administration from San Jose State University and a
Bachelor of Science degree in Economics and Finance from Southern New Hampshire University.
Board of Directors
The following table sets forth information with respect to those persons who serve on our board of directors.
Name
Alan Lowe
Harold Covert
Penelope Herscher
Martin Kaplan
Brian Lillie
Samuel Thomas
(1) Member of our audit committee
(2) Member of our compensation committee
(3) Member of our governance committee
(4) Chairman of the board of directors
Position
Age
53
68
55
78
51
64
Director
Director (1)(2)
Director (2)(3)
Director (1)(3)(4)
Director (1)(3)
Director (2)
We have determined that Mr. Lowe is qualified to serve as a member of our board of directors because of his years of experience at Viavi, Asyst
Technologies, Inc. and Read-Rite. In these roles Mr. Lowe has developed extensive business, management, and leadership skills, as well as broad and deep
experience with our company and its businesses. Mr. Lowe brings unique understandings and perspectives to our board on strategic, management, and operational
matters.
Harold Covert has served on our board of directors since July 2015. Mr. Covert is an independent business consultant. Mr. Covert served as executive vice
president and chief financial officer of Lumos Networks Corporation, a fiber-based service provider from 2011 to 2014. From 2010 to 2011, Mr. Covert was an
independent business consultant. From 2007 to 2010, Mr. Covert was president, chief financial officer and chief operating officer of Silicon Image, Inc., a provider
of semiconductors for storage, distribution and presentation of high-definition content. Mr. Covert is also a member of the board of directors of Harmonic, Inc.
Within the past five years he was also a member of the board of directors of Viavi until the completion of the Separation, and Solta Medical, Inc., which was
acquired in 2014. Mr. Covert holds a Bachelor of Science degree in Business Administration from Lake Erie College and a Masters degree in Business
Administration from Cleveland State University and is also a Certified Public Accountant. We have determined that Mr. Covert is qualified to serve as a member
of our board of directors because of his significant experience and service in leadership roles in finance and accounting obtained through his tenure as chief
financial officer of seven publicly traded technology companies.
Penelope Herscher has served on our board of directors since July 2015. Ms. Herscher is the president and chief executive officer of FirstRain, Inc., an
enterprise software company, which she joined in 2005. From 2002 to 2003, Ms. Herscher held the position of executive vice president and chief marketing officer
at Cadence Design Systems, Inc., an electronic design automation software company. From 1996 to 2002, Ms. Herscher was president and chief executive officer
of Simplex Solutions, which was acquired by Cadence in 2002. Ms. Herscher serves on the board of directors of Rambus Inc. and FirstRain. Ms. Herscher was also
a member of the board of directors of Viavi until the completion of the Separation. Ms. Herscher holds a Master of Arts degree in Mathematics and a Bachelor of
Arts degree with honors in Mathematics from Cambridge University in England. We have determined that Ms. Herscher is qualified to serve as a member of our
board of directors because of her experience as chief executive officer of several technology companies, her extensive marketing and technical background and her
position on the board and compensation committee at Rambus, Inc.
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Martin Kaplan has served on our board of directors since July 2015. Mr. Kaplan is chairman of the board of Superconductor Technologies and was a
member of the board of directors of Viavi until the completion of the Separation. Within the past five years, Mr. Kaplan also served on the board of directors of
Tekelec, Inc. From May 1998 until his retirement in May 2000 after 40 years in the technology industry, Mr. Kaplan was executive vice president of Pacific
Telesis Group, Inc., parent of Pacific Bell, a telecommunications company, responsible for integration following the merger of SBC Communications, Inc.
(“SBC”), a telecommunications company, and Pacific Telesis Group, Inc., followed by the same role for other SBC mergers. Mr. Kaplan holds a Bachelor of
Science degree in Engineering from California Institute of Technology. We have determined that Mr. Kaplan is qualified to serve as a member of our board of
directors because of his extensive business leadership, operational and technical experience in the telecommunications industry, including substantial experience in
mergers and acquisitions. Additionally, his experience on the boards and committees of public and private companies will be useful in his service as a member of
our board and committees.
Brian Lillie has served on our board of directors since July 2015. Mr. Lillie is the Chief Information Officer of Equinix, Inc., a global provider of data center
and internet exchange services, which he joined in 2008. Prior to joining Equinix, Mr. Lillie held several executive-level roles at VeriSign, Inc., a provider of
intelligent infrastructure services, including Vice President of global information systems and Vice President of global sales operations. Mr. Lillie holds a Master
of Science degree in Management from Stanford University’s Graduate School of Business, a Master of Science degree in Telecommunications Management from
Golden Gate University and a Bachelor of Science degree in Mathematics from Montana State University. We have determined that Mr. Lillie is qualified to serve
as a member of our board of directors because of his extensive executive-level experience in the technology industry and specifically in the data center markets.
Samuel Thomas has served on our board of directors since July 2015. Mr. Thomas is chairman, chief executive officer and president of Chart Industries,
Inc., an engineered cryogenic equipment manufacturer serving the natural gas and industrial gas industries, which he joined in 2003. From 1998 to 2003, Mr.
Thomas was executive vice president of Global Consumables at ESAB Holdings Ltd., a provider of welding consumables and equipment. Mr. Thomas holds a
Bachelor of Sciences degree in Mechanical Engineering from Rensselaer Polytechnic Institute. We have determined that Mr. Thomas is qualified to serve as a
member of our board of directors because of his extensive executive-level experience in manufacturing, sales and marketing and operations. Additionally, we also
have a substantial international presence and Mr. Thomas has significant international experience gained over a 39-year career with Chart Industries, ESAB
Holdings Ltd. and T&N Plc.
Director Independence
Our board of directors consists of six members. Our board of directors consists of a majority of independent directors and committees of our board of
directors consist solely of independent directors, as required by NASDAQ listing standards. Our board of directors has determined that the following directors are
independent: Harold Covert, Penelope Herscher, Martin Kaplan, Brian Lillie and Samuel Thomas.
Committees of the Board of Directors
Our board of directors consists of an audit committee, a compensation committee, and a governance committee. Each of these committees is comprised
entirely of independent directors, as required by NASDAQ listing standards. Each of these committees operates under a written charter adopted by our board of
directors, which is available under the Investors tab on our website at www.lumentum.com .
Audit
Committee
The members of our audit committee are Mr. Covert, who serves as chairperson, and Messrs. Kaplan and Lillie. Each member is an independent director as
defined in NASDAQ listing standards, and satisfies the additional criteria for independence for audit committee members set forth in Rule 10A-3(b)(1) under the
Exchange Act and is financially literate as prescribed by NASDAQ listing standards. Mr. Covert qualifies as an “audit committee financial expert” under SEC
rules.
Our audit committee oversees our accounting and financial reporting processes and audits of our consolidated financial statements. Our audit committee is
responsible for the appointment, compensation, retention and oversight of our independent registered public accounting firm, including evaluating its independence
and reviewing its performance. In addition, our audit committee is responsible for reviewing and discussing the annual audit plan with our independent registered
public accounting firm, reviewing our annual consolidated financial statements, our interim consolidated financial statements, our internal control over financial
reporting, and our accounting practices and policies. Furthermore, our audit committee oversees our internal audit function, reviews and approves our annual
internal audit plan, reviews with management our risk assessment and risk management policies and procedures, reviews and approves or disapproves any
proposed transactions required to be disclosed by Item 404 of Regulation S-K, and reviews legal and regulatory matters. Our audit committee also reviews the
results of the
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year-end audit with the independent registered public accounting firm and recommends to our board of directors whether the financial statements should be
included in our annual reports. Additionally, our audit committee prepares our audit committee report to be included in the annual proxy statement. Our audit
committee also performs other functions or duties, within the scope of its responsibilities, as deemed appropriate by our audit committee or our board of directors.
Our audit committee has established procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or
auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
Compensation
Committee
The members of our compensation committee are Ms. Herscher, who serves as chairperson, and Messrs. Covert and Thomas. Each member is an independent
director as defined in NASDAQ listing standards, including the enhanced independence requirements applicable to compensation committee members.
Our compensation committee oversees, provides guidance with respect to, and reviews and approves as appropriate, our overall compensation policies,
structure and programs for our employees and officers. Our compensation committee reviews and approves our executive compensation programs and is
responsible for reviewing the compensation of our executive officers and determining the nature and amount of the various components of such compensation,
including adjustments to annual base salary and the establishment of the applicable performance goals under our annual management incentive bonus plan and the
specific bonus amount for each potential level of goal attainment. Our compensation committee authorizes and approves the granting of stock options and other
equity incentive awards under our equity incentive plans.
Our compensation committee approves all employment agreements, severance or termination arrangements and other compensatory contracts or
arrangements made with our executive officers other than our chief executive officer. Our compensation committee performs other functions or duties as may be
assigned to it under the terms of any executive compensation or equity-based benefit plan or as otherwise deemed appropriate by our board of directors.
Our board of directors makes all decisions regarding the cash and equity compensation of our chief executive officer, although our compensation committee
makes recommendations to our board of directors concerning our CEO’s compensation and reviews and recommends to our board of directors for approval
corporate goals and objectives relevant to our CEO’s compensation. With respect to all other executive officers, our compensation committee reviews and
approves their compensation, taking into account the recommendations of our chief executive officer who annually reviews the performance of the other executive
officers and then presents to our compensation committee the conclusions reached and the recommendations for their compensation based on those reviews. Mr.
Lowe recuses himself from all decisions regarding his own compensation.
Our compensation committee has the authority to retain the services of independent counsel, consultants, or other advisors, including an independent
compensation consulting firm, in connection with its responsibilities in setting compensation for our executive officers. Our compensation committee may form
subcommittees and delegate such authority as the compensation committee deems appropriate, subject to any restrictions imposed by law or listing standard.
Governance
Committee
The members of our governance committee are Ms. Herscher, Mr. Kaplan, who serves as chairperson, and Mr. Lillie. Each member is an independent
director as defined in NASDAQ listing standards.
Our governance committee is responsible for developing, and annually updating, a long-term plan for composition of our board of directors that takes into
consideration the current strengths, weaknesses, skills and experience on our board of directors, anticipated retirement dates and our strategic direction. Our
governance committee develops recommendations regarding the essential and desired skills and experiences for potential directors.
Our governance committee is responsible for recommending nominees for election as directors in accordance with our director nomination process and
selection criteria. Our governance committee is also responsible for assisting our board of directors with regard to the composition, structure and procedures of our
board of directors and its committees, including by reviewing and making recommendations to our board of directors regarding the orientation and ongoing
performance and development of our directors, continuing education programs and evaluation programs. Our governance committee also oversees the evaluation
of our board of directors and its committees and annually nominates the chairman of the board of directors. In addition, our governance
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committee is responsible for reviewing annually the charters of our board of directors and board committees to ensure compliance with applicable laws and
regulations, as well as reviewing annually the independence of our board of directors and board committees.
Code of Business Conduct
The Company has adopted a code of ethics (known as the Code of Business Conduct) which is applicable to all employees, officers and directors of the
Company. The full text of the Code of Business Conduct is available under Corporate Governance which can be found under the Investors tab on the Company's
website at www.lumentum.com.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that our executive officers and directors, and persons who own more than 10% of a registered class of our equity
securities, file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC and the NASDAQ. Executive officers, directors and greater than
10% stockholders are required by the SEC to furnish us with copies of all Forms 3, 4 and 5 that they file.
No filings on Form 3, 4, 5 were required in our fiscal year ended June 27, 2015, as we became a public company in August 2015 after the end of our most
recently completed fiscal year.
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ITEM 11. EXECUTIVE COMPENSATION
During our fiscal year ended June 27, 2015, we were a wholly-owned subsidiary of Viavi. The information presented in this section describes the
compensation of our employees who serve as our chief executive officer and our two other most highly compensated employees, based on compensation paid by
Viavi for the fiscal year ended June 27, 2015 (collectively, our “named executive officers” or our “NEOs”).
Our NEOs and their titles are as follows:
•
•
•
Alan Lowe, President and Chief Executive Officer
Craig Cocchi, Senior Vice President, Operations
Vincent Retort, Senior Vice President, Research and Development
Summary Compensation Table
The following table provides certain summary information concerning the compensation paid by Viavi for the fiscal years ended June 28, 2014 and June 27,
2015 to our NEOs. Position titles refer to each NEO's current title at Lumentum.
Name and Principal Position
Alan Lowe
President and Chief Executive Officer
Craig Cocchi
Senior Vice President, Operations
Vincent Retort
Senior Vice President, Research and
Development
Salary
($)
Stock Award
($)(1)
562,000
1,195,001
555,231
1,725,200
319,808
305,368
564,638
575,068
Non-Equity
Incentive Plan
Compensation
($)(2)
All Other
Compensation
($)(3)
Total
($)
205,135
175,683
82,050
77,168
4,000
4,000
1,966,136
2,460,114
4,000
4,000
970,496
961,604
338,077
318,846
677,565
718,834
86,641
80,384
4,000
4,000
1,106,283
1,122,064
Year
2015
2014
2015
2014
2015
2014
(1) Amounts shown do not reflect compensation actually received by the NEO. Instead, the amounts shown are the grant date fair value in the period
presented as determined pursuant to stock-based compensation accounting rule FASB ASC Topic 718, excluding the effect of estimated forfeitures. The
assumptions used to calculate these amounts are set forth under “Note 11. Stock Based Compensation” in this Annual Report on Form 10-K for the fiscal
year ended June 27, 2015.
(2) All non-equity incentive plan compensation for fiscal years 2014 and 2015 was paid pursuant to the JDSU Variable Pay Plan.
(3) All amounts represent 401(k) matching or 401(k) contributions by Viavi.
Variable Pay Plan
During each of fiscal years 2014 and 2015, Viavi utilized a single cash incentive program for the majority of its employees globally, including its named
executive officers, known as the Variable Pay Plan (“VPP”). Under the VPP, incentive bonuses were determined based on a quarterly operating income metric, and
paid semi-annually. Each participant in the VPP was assigned a target incentive opportunity (“TIO”) equal to a percentage of his or her base salary, based upon the
individual’s grade level within Viavi.
For fiscal year 2015, the assigned TIO for Mr. Lowe was 85%, and the assigned TIO for Mr. Cocchi and Mr. Retort was 60%. For fiscal year 2014, the
assigned TIO for Mr. Lowe was 75% and the assigned TIO for Mr. Cocchi and Mr. Retort was 60%. The actual cash incentive payments awarded to each employee
annually under each VPP was subject to adjustment 0% to 200% of each employee’s assigned TIO, depending on Viavi’s achievement of its operating income
target. Additionally, the actual incentive payment awarded to all employees within any individual operating segment participating in each VPP was subject to
adjustment
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lower or higher by up to 15% based upon the discretion of the chief executive officer of Viavi, although any adjustment that would affect the chief executive
officer must be approved by the independent members of Viavi's board of directors, any adjustment that would affect the other named executive officers must be
approved by Viavi's compensation committee.
Actual incentive payments awarded to Mr. Lowe, Mr. Cocchi and Mr. Retort in each of fiscal years 2014 and 2015 are indicated in the “Non-Equity Incentive
Plan Compensation” column of the Summary Compensation Table.
Market Stock Units
During each of fiscal years 2014 and 2015, Viavi granted RSUs with market conditions, also known as MSUs, to executive officers, including our named
executive officers. Each unit represents a right to receive one share of common stock upon vesting. When granting MSUs, the Viavi compensation committee
assigned a target number of units to each award. MSUs vest over three or four years, and the number of units actually earned on each vesting date was determined
by comparing Viavi’s total stockholder return (“TSR”) for the relevant period to the TSR of the component companies of the NASDAQ Telecommunications
Index (the “Index”) on a straight-line scale from 0% to 150% as described in the following table.
Relative Performance
Viavi TSR below 25th percentile
Viavi TSR at 25th percentile
Viavi TSR at 50th percentile
Viavi TSR at or above 75th percentile
Percent of Target
Award Vesting
0%
50%
100%
150%
TSR is initially calculated for a baseline period, which for grants made in fiscal year 2014 was July 15, 2013 through September 15, 2013 (the “Initial
Measurement Period”). Vesting is then determined by comparing the TSR during each of the next three July 15 through September 15 measurement periods against
the Initial Measurement Period.
The target number of units subject to MSU awards held by Mr. Lowe, Mr. Cocchi and Mr. Retort are shown in the Outstanding Equity Awards At Fiscal-
Year End Table.
In connection with the Separation, the 2015 measurement period, as well as the vesting and performance goals applicable to the remaining Lumentum MSU
awards were adjusted by the compensation committee of our board of directors. For a discussion of these adjustments, see the section entitled "-Treatment of
Equity Awards at Separation-Market Stock Units."
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Outstanding Equity Awards at Fiscal Year-End Table
The following table provides information regarding outstanding equity awards and applicable market values at the end of fiscal year 2015. All references in
the following table to stock options and restricted stock units relate to awards granted by Viavi in respect of Viavi common shares. In connection with the
Separation, these stock options and restricted stock units were converted into Lumentum stock options and restricted stock units, subject to the adjustments
described below in the section entitled “-Treatment of Equity Awards at Separation.”
Option Awards
Stock Awards
Name
Alan Lowe
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
36,667 (2)
18,334 (2)
36,250 (2)
72,500 (2)
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
__
__
__
__
Option
Exercise
Price
($)
5.87
5.87
10.27
10.27
Number of Shares
or Units of Stock
That Have Not
Vested
(#)
Option
Expiration
Date
8/15/2017
8/15/2017
8/15/2018
8/15/2018
Market Value
of Shares or
Units of Stock
That Have Not
Vested
($) (1)
Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That Have
Not Vested
(#)
Equity Incentive Plan
Awards:
Market or Payout
Value of Unearned
Shares, Units or
Other Rights That
Have Not Vested
($) (1)
Craig Cocchi
26,667 (2)
60,000 (2)
18,750 (2)
__
__
__
__
37,500 (5)
3.56
10.27
25.05
25.05
2/15/2017
8/15/2018
2/15/2019
2/15/2019
Vince Retort
45,000 (2)
18,750 (2)
__
__
__
37,500 (5)
10.27
25.05
25.05
8/15/2018
2/15/2019
2/15/2019
5,444
25,125
50,000
(3)
(3)
(3)
65,382
301,751
600,500
2,094 (3)
8,375 (3)
23,625 (3)
25,149
100,584
283,736
2,513 (3)
10,469 (3)
28,350 (3)
30,181
125,733
340,484
21,667
40,000
50,000
(4)
(4)
(4)
260,221
480,400
600,500
8,334 (4)
13,334 (4)
23,625 (4)
100,091
160,141
283,736
10,000 (4)
16,667 (4)
28,350 (4)
120,100
200,171
340,484
(1) Amounts reflecting market value of RSUs are based on the price of $12.01 per share, which was the closing price of Viavi's common stock as reported on NASDAQ on
June 26, 2015.
(2) Fully vested stock option.
(3) Time-based RSUs that vest 1⁄3 of the awarded units on the first anniversary of the grant date and the remainder of the units in equal quarterly installments for two years
thereafter.
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(4) MSUs that vest in three annual tranches based upon our TSR relative to the performance of the component companies of the Index over the three-year period. The actual
number of shares that vest range from 0% to 150% of the target amount for each vesting tranche. The number of MSUs disclosed in the table above reflects vesting at
100% of the target amount.
(5) Stock options with market conditions granted on February 15, 2011, which vest 1/4 of the awarded options on the first anniversary of the grant date and the remainder of
the awarded options in equal quarterly installments for three years thereafter. The options become exercisable upon the latter to occur of (i) the vesting schedule noted
in the previous sentence and (ii) the appreciation of the price of the common stock such that it will have traded at a minimum of a 25% premium to the exercise price
of the options for at least 30 consecutive trading days.
Each of the options and other equity awards reflected in the above table were issued under the JDS Uniphase Corporation Amended and Restated 2003
Equity Incentive Plan (the “2003 Plan”).
Payments Upon a Termination or Change of Control
2015 Change in Control Benefits Plan
On April 14, 2015, the board of directors of Viavi approved the Lumentum 2015 Change in Control Benefits Plan (the “Lumentum CIC Plan”) to provide
certain severance and other benefits to eligible executives employed by Lumentum or its subsidiaries whose employment is terminated as a result of or following a
change in control of Lumentum occurring after the spin-off. A change in control of Lumentum includes the acquisition by any person of more than 50% of the fair
market value or voting power of outstanding Lumentum voting stock, a merger of Lumentum unless the Lumentum stockholders retain more than 50% of the
voting power of the securities of the surviving entity and the Lumentum directors constitute a majority of the surviving entity’s board of directors, or sale of
substantially all of the assets of Lumentum.
Eligible executives are those employed in the United States or Canada who are (a) at the level of Senior Vice President or above and who (i) hold one or
more of the following positions or their functional equivalents: Chief Financial Officer, Chief Administrative Officer, Chief Legal Officer, Chief Information
Officer, Chief Marketing Officer, Chief Research & Development Officer, Chief Operations Officer, Global Sales Officer and the senior executive responsible for
Human Resources, or (ii) are designated in writing by the Chief Executive Officer as being an eligible executive, subject to subsequent review and ratification by
the compensation committee at its discretion, or (b) are at the level of Vice President or above and who hold the position of VP Laser Product Line Management,
VP Optical Communications Product Line Management, VP Strategy and Corporate Development, or VP General Counsel.
The Lumentum CIC Plan provides that in the event of a qualifying termination, each of the eligible executives will be entitled to receive (i) accelerated
vesting in full of any unvested equity awards held at the time of termination (including accelerated vesting of any performance-based awards at 100% of the target
achievement level), (ii) a lump sum payment (less applicable tax and other withholdings) equal to two years’ base salary, and (iii) reimbursement of COBRA
premiums for the lesser of 12 months or the maximum allowable COBRA period. A qualifying termination under the Lumentum CIC Plan is (i) any involuntary
termination without cause or resignation for good reason during the period beginning upon the public announcement of an intent to consummate a change in
control of Lumentum and ending 12 months following the consummation of the change in control, or (ii) any termination due to disability or death occurring
within 12 months following a change in control of Lumentum.
Effective as of August 2, 2015, the compensation committee of our board of directors amended the Lumentum CIC Plan to provide that in the event an
eligible executive's employment is terminated without "cause" or the eligible executive resigns for "good reason", in either case, occurring outside the date
beginning on the public announcement of an intent to consummate a change in control of Lumentum and ending 12 months following the consummation of the
change in control, the eligible executive will be entitled to receive (subject to the executive signing and not revoking a release of claims that become effective in
accordance with the Lumentum CIC Plan) (i) accelerated vesting of any unvested Lumentum equity awards held at the time of termination as to the number of
shares that otherwise would vest over the 9-month period following the termination date, (ii) a lump sum payment (less applicable tax and other withholdings)
equal to 9 months of base salary, and (iii) reimbursement of COBRA premiums for the lesser of 9 months or the maximum allowable COBRA period.
The Lumentum CIC Plan will be administered by the compensation committee of our board of directors. It will terminate on June 30, 2018 if no change in
control of Lumentum has occurred by that date.
2015 Equity Incentive Plan
Outstanding awards under the Lumentum Holdings Inc. 2015 Equity Incentive Plan (the “2015 Plan”) will terminate upon the consummation of a corporate
transaction (as described below) except to the extent that they are continued by us or assumed by the successor entity or its parent. Except as otherwise provided by
the award agreement, the vesting of an outstanding award will be accelerated in full if it is not continued by us or assumed or replaced by the successor entity or its
parent in connection with a corporate transaction. The 2015 Plan provides that a corporate transaction includes (i) the sale of all or substantially all of
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our assets, (ii) the complete dissolution or liquidation of Lumentum, (iii) a merger or consolidation in which Lumentum is not the surviving entity, (iv) any reverse
merger in which Lumentum is the surviving entity but in which securities possessing more than 40% of the total combined voting power of Lumentum’s
outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger, or (v) the acquisition
in a single or series of related transactions by any person or related group of persons of beneficial ownership of securities possessing more than 50% of the total
combined voting power of our outstanding securities.
Treatment of Equity Awards at Separation
Viavi has outstanding equity awards relating to its common stock in the form of stock options, RSUs and MSUs under its Amended and Restated 2003
Equity Incentive Plan and 2005 Acquisition Equity Incentive Plan (the “JDSU Equity Plans”). The JDSU Equity Plans require adjustments to outstanding Viavi
equity awards in the event of certain transactions, including the distribution of our common stock in connection with the Separation.
Generally, Viavi equity awards held by our employees, including our named executive officers, immediately prior to the Separation were converted into
awards for shares of our common stock under the 2015 Plan described below, with specific adjustments to these awards to reflect the Separation depending on the
type of award. The following discussion describes the treatment of Viavi equity awards held by our employees, including our named executive officers, as set forth
in the employee matters agreement as described under "Certain Relationships and Related Person Transactions". This treatment became effective as of the
distribution date of shares of our common stock to Viavi stockholders in connection with the Separation (the "distribution date").
Service-Vesting Stock Options
Viavi options that vest based solely on their holder’s service and that were outstanding on the distribution date and held by our employees were converted
into Lumentum options, without any changes to the original terms of the Viavi options, other than appropriate adjustments to the number of shares of our common
stock subject to each Lumentum option and to the exercise price payable per share in order to preserve the economic value of the Viavi options immediately prior
to the Separation.
Stock Options with Market Conditions
Certain outstanding Viavi options held by our employees prior to the Separation were scheduled to vest based upon the holder’s continued service with Viavi
but would not become exercisable until Viavi’s common stock price exceeds a stated threshold for 30 consecutive trading days. These options were adjusted in the
same manner described for service-vesting options, except that, for purposes of determining whether the share price requirement is satisfied during the 30 days
following the distribution date, our share price (as adjusted to reflect the distribution) was combined with the Viavi share price.
Restricted Stock Units
Viavi RSUs held by our employees on the distribution date were converted into RSUs for shares of our common stock, without any changes to the original
terms of the Viavi RSUs, other than appropriate adjustments to the number of shares of our common stock subject to the Lumentum RSU awards in order to
preserve the economic value of these awards immediately prior to the Separation.
Market Stock Units
Viavi MSU awards held by our employees prior to the Separation were scheduled to vest based upon their holder’s continued service and the relative Viavi
TSR in comparison to the TSR range of the companies included in the Index during a specified measurement period. Viavi MSU awards held by our employees on
the distribution date were converted into Lumentum awards in the same manner described for Viavi MSUs.
In connection with the Separation and distribution, the compensation committee of our board of directors approved the following adjustments to the
performance goals applicable to the outstanding, converted Lumentum MSU awards, including MSU awards held by our NEOs.
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Original Viavi MSU Award
Vesting Terms of Converted Lumentum MSU Award
2012 Viavi MSU Award
2013 Viavi MSU Award
2014 Viavi MSU Award
The number of Lumentum MSUs that vest will be based on Viavi TSR relative to the
performance of those companies in the Index measured over a 60-day period ending on July
31, 2015, with a vesting date of September 25, 2015
For 50% of the unvested Viavi MSUs: the number of corresponding Lumentum MSUs that
vest will be based on Viavi TSR relative to the performance of those companies in the Index
measured over a 60-day period ending on July 31, 2015, with a vesting date of September
25, 2015; and
For the remaining 50% of unvested Viavi MSUs: the number of corresponding Lumentum
awards that vest will be based on Lumentum’s performance in fiscal year 2016 relative to a
revenue target set by the compensation committee, with the holder being eligible to earn up
to 150% of the target amount based on certain levels of achievement in excess of the revenue
target. The vesting date will be September 25, 2016.
For 1/3 of the unvested Viavi MSUs: the number of corresponding Lumentum MSUs that
vest will be based on Viavi TSR relative to the performance of those companies in the Index
measured over a 60-day period ending on July 31, 2015, with a vesting date of September
25, 2016; and
For the remaining 2/3 of the unvested Viavi MSUs: the number of corresponding Lumentum
awards that vest will be based on Lumentum’s performance in fiscal year 2016 relative to a
revenue target set by the compensation committee, with the holder being eligible to earn up
to 150% of the target amount based on certain levels of achievement in excess of the revenue
target. The vesting dates will be September 25, 2016 (50% of any earned Lumentum awards)
and September 25, 2017 (50% of any earned Lumentum awards).
Continued Service-Vesting
The service-vesting requirements in effect for each Viavi award held by our employees prior to the Separation remained unchanged in connection with the
Separation from Viavi and are measured in terms of both service prior to the Separation and continued service with Lumentum after the Separation.
Director Compensation
Compensation for our non-employee directors ("Outside Directors") consists of a mix of cash and equity-based compensation that is competitive with the
compensation paid to non-employee directors within our peer group.
The following sets forth the annual retainer, equity awards and committee premiums for our Outside Directors:
Equity Awards
Initial Award
Each Outside Director will be granted an initial award of RSUs with a grant date fair value equal to $200,000 (the “Initial RSU Award”). These awards will
be granted on the date of the first meeting of our board of directors or compensation committee occurring on or after the date on which the individual first became
an Outside Director. The Initial RSU Award will vest in three annual installments from the commencement of the individual’s service as an Outside Director,
subject to
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continued service as a director through the applicable vesting date. If a director’s status changes from an employee director to an Outside Director, he or she will
not receive an Initial RSU Award.
Annual Awards
On the date of each annual meeting of our stockholders, each Outside Director who has served on our board of directors for at least the preceding six months
will be granted an award of RSUs with a grant date fair value equal to $175,000 (the “Annual RSU Award”). With respect to fiscal year 2016, we anticipate
granting an Annual RSU Award to each of our eligible Outside Directors in December 2015, whether or not we hold an annual meeting of stockholders during
such fiscal year. The Annual RSU Award will vest upon the earlier of (i) the day prior to the next year’s annual meeting of stockholders or (ii) one year from
grant, subject to continued service as a director through the applicable vesting date.
Severance Provisions for Equity Awards
Upon retirement of an Outside Director, all unvested RSUs will automatically vest in full. The treatment of unvested RSUs held by an Outside Director upon
a change in control will be determined by the terms of the 2015 Plan.
Non-Employee Director Cash Compensation
Annual Fee
Each Outside Director will receive an annual cash retainer of $85,000 for serving on our board of directors (the “Annual Fee”), paid quarterly. In addition to
the Annual Fee, the non-employee board chair will be entitled to an additional cash retainer of $60,000.
Committee Service
The chairpersons of the three standing committees of our board of directors will be entitled to the following annual cash retainers, paid quarterly:
Board Committee
Audit Committee
Compensation Committee
Governance Committee
$
Chairperson Fee
25,500
20,000
15,000
Outside Director Compensation for Fiscal Year 2015
During fiscal 2015, we operated under Viavi as its subsidiary. Consequently, the Outside Directors did not receive any compensation for their service on our
board of directors during fiscal 2015.
Indemnification of Directors and Officers
We have entered into indemnification agreements with each of our executive officers and directors. These agreements provide that, subject to limited
exceptions and among other things, we will indemnify each of our executive officers and directors to the fullest extent permitted by law and advance expenses to
each indemnitee in connection with any proceeding in which a right to indemnification is available. We have also obtained liability insurance for each director and
officer for certain losses arising from claims or charges made against them while acting in their capacities as directors or officers of us.
Compensation Committee Interlocks and Insiders Participation
Our compensation committee consists entirely of independent directors that our board of directors has determined to be independent within the meaning of
the NASDAQ listing standards. None of our compensation committee’s members are:
•
•
•
a current or former officer or employee of Lumentum;
a participant in a “related person” transaction occurring after July 3, 2011 (for a description of our policy on related-person transactions, see
“Certain Relationships and Related Person Transactions-Procedures for Approval of Related Person Transactions”); or
an executive officer of another entity at which one of our executive officers serves on our board of directors.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Equity Compensation Plan Information
The following table sets forth information about shares of Viavi’s common stock that may be issued under Viavi’s equity compensation plans, including
compensation plans that were approved by Viavi’s stockholders as well as compensation plans that were not approved by Viavi’s stockholders. Information in the
table is as of June 27, 2015.
Plan Category
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights (a)
Weighted-average Exercise
Price of Outstanding Options,
Warrants and Rights ($) (b)
Equity compensation plans approved by security holders
11,056,364 (1)
$
Equity compensation plans not approved by security holders
(3)
Total
280,512 (3)
11,336,876 (5)
$
2.46
—
2.40
Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans
(excluding securities reflected
in column (a)) (c)
13,393,993 (2)
637,785 (4)
14,031,778
(1) Represents shares of Viavi’s common stock issuable upon exercise of options and restricted stock units outstanding under Viavi’s 2003 Equity Incentive
Plan. Excluding outstanding RSUs, which have no exercise price, as of June 27, 2015 there were options to purchase 2,507,364 shares outstanding at a
weighted average exercise price of $10.84.
(2) Represents shares of Viavi’s common stock authorized for future issuance under the following equity compensation plans: 2003 Equity Incentive Plan (under
which 10,194,822 shares remain available for grant); Amended and Restated 1998 Employee Stock Purchase Plan (under which 3,199,171 shares remain
available for grant).
(3) Represents shares of Viavi’s common stock issuable upon exercise of options outstanding under Viavi's 2005 Acquisition Equity Incentive Plan.
(4) Represents shares of Viavi's common stock authorized for future issuance under Viavi's 2005 Acquisition Equity Incentive Plan (under which 637,785 shares
remain available for grant).
(5) Excluding outstanding RSUs, which have no exercise price, as of June 27, 2015 there were options to purchase 2,507,364 shares outstanding at a weighted
average exercise price of $10.84.
The following are descriptions of the material features of Viavi’s equity compensation plans that were not approved by its Stockholders:
Viavi's 2005 Acquisition Equity Incentive Plan
The Viavi Board of Directors adopted the 2005 Acquisition Equity Incentive Plan (the “2005 Plan”) in August 2005. The 2005 Plan is administered by
Viavi's Compensation Committee. Pursuant to the 2005 Plan, the Compensation Committee may grant stock options, SARs, Dividend Equivalent Rights,
Restricted Stock, Restricted Stock Units and Performance Units to employees (including directors and officers) of Viavi or any parent or subsidiary corporation of
Viavi, or any other such entity in which Viavi holds a substantial ownership interest. Pursuant to NASDAQ listing rules regarding equity compensation plans not
approved by security holders, Viavi only issued awards under the 2005 Plan to individuals joining Viavi as a result of acquisitions or related strategic transactions,
and not for new grants to continuing employees of Viavi, nor to regular new hires. The 2005 Plan will continue in effect until terminated by the Viavi Board of
Directors.
An aggregate of 2,800,000 shares were reserved for the grant of awards under the 2005 Plan. As of June 27, 2015, there were 637,785 shares remaining
available for future grants under the 2005 Plan. Shares underlying awards that are forfeited, canceled or expired are not counted as having been issued under the
2005 Plan. Stock options and any awards intended to qualify as performance-based compensation issued under the 2005 Plan must have an exercise price of not
less than 100% of the fair market value of Viavi’s Common Stock on the date of grant of the award. Awards are generally non-transferable. The term of all awards
granted under the Plan shall not exceed eight years from the date of grant.
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Security Ownership Information
As of August 22, 2015, there were 58,917,552 shares of our common stock outstanding. The following table reports the number of shares of our common
stock beneficially owned as of August 22, 2015, by (i) all persons who are beneficial owners of five percent or more of our common stock, (ii) each director and
named executive officers, and (iii) all current directors and executive officers as a group. We have determined beneficial ownership in accordance with the rules of
the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Unless otherwise indicated below, to our knowledge, the
persons and entities named in the table have sole voting and sole investment power with respect to all shares that they beneficially own, subject to community
property laws where applicable. In computing the number of shares of our common stock beneficially owned by a person and the percentage ownership of that
person, we deemed outstanding shares of our common stock subject to options or restricted stock units held by that person that are currently exercisable or
exercisable within 60 days of August 22, 2015. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any
other person. We have based percentage ownership of our common stock on 58,917,552 shares of our common stock outstanding as of August 22, 2015. Unless
otherwise indicated, the address of each beneficial owner listed on the table below is c/o Lumentum Holdings Inc., 400 North McCarthy Boulevard, Milpitas,
California, 95035.
Name and Address of Beneficial Owner
5% or more Stockholders
Viavi Solutions, Inc.(1)
430 N. McCarthy Boulevard
Milpitas, CA 95035
Directors and Named Executive Officers
Alan Lowe (2)
Harold Covert (3)
Penny Herscher
Martin Kaplan
Brian Lillie
Samuel Thomas
Craig Cocchi (4)
Vince Retort (5)
All directors and executive officers as a group (11 persons) (6)
* Indicates ownership of less than 1% of our common stock.
Number of Shares Beneficially Owned
Number
Percentage
11,692,855
19.8%
170,752
8,262
10,157
10,346
__
__
72,538
56,222
338,841
*
*
*
*
*
*
*
*
*
(1)
(2)
(3)
(4)
(5)
(6)
Includes 11,692,855 shares retained by Viavi in connection with the Separation.
Includes (i) 89,389 shares subject to stock options currently exercisable or exercisable within 60 days of August 22, 2015 and (ii) 28,027 RSUs which vest
within 60 days of August 22, 2015, all of which are restricted stock unit awards which we refer to as market stock units ("MSUs"). MSUs are reported at
100% of the target number of shares scheduled to vest within 60 days of August 22, 2014. Details of the conditions and terms under which the MSUs will vest
are described in the section entitled "Executive Compensation - Outstanding Equity Awards at Fiscal Year End Table".
Includes 886 shares subject to stock options currently exercisable or exercisable within 60 days of August 22, 2015.
Includes (i) 58,546 shares subject to stock options currently exercisable or exercisable within 60 days of August 22, 2015 and (ii) 11,385 RSUs which vest
within 60 days of August 22, 2015, all of which are MSUs. MSUs are reported at 100% of the target number of shares scheduled to vest within 60 days of
August 22, 2015. Details of the conditions and terms under which the MSUs will vest are described in the section entitled "Executive Compensation -
Outstanding Equity Awards at Fiscal Year End Table".
Includes (i) 34,800 shares subject to stock options currently exercisable or exercisable within 60 days of August 22, 2015 and (ii) 13,783 RSUs which vest
within 60 days of August 22, 2015, all of which are MSUs. MSUs are reported at 100% of the target number of shares scheduled to vest within 60 days of
August 22, 2015. Details of the conditions and terms under which the MSUs will vest are described in the section entitled "Executive Compensation -
Outstanding Equity Awards at Fiscal Year End Table".
Includes (i) 182,621 shares subject to stock options currently exercisable or exercisable within 60 days of August 22, 2015 and (ii) 57,436 RSUs which vest
within 60 days of August 22, 2015, all of which are MSUs. MSUs are reported at 100% of the target number of shares scheduled to vest within 60 days of
August 22, 2015. Details of the conditions and terms
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under which the MSUs will vest are described in the section entitled "Executive Compensation - Outstanding Equity Awards at Fiscal Year End Table".
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Agreements with Viavi
On July 31, 2015, we entered into a separation agreement with Viavi as well as various other ancillary agreements in order to effect the Separation and
provide a framework for our relationship with Viavi after the Separation, including a contribution agreement, a membership interest transfer agreement, a supply
agreement, a tax matters agreement, an employee matters agreement, an escrow agreement, an intellectual property matters agreement, stockholder’s and
registration rights agreement, and the local transfer documents executed in connection with the Separation. These agreements provide for the allocation between us
and Viavi of Viavi’s assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities)
attributable to periods prior to, at and after Separation and will govern certain relationships between us and Viavi after the Separation. Additionally, we entered
into a securities purchase agreement with Viavi and Amada relating to the sale of Lumentum Inc.’s Series A Preferred Stock by Viavi to Amada. Certain
agreements were filed as exhibits to this Annual Report on Form 10-K for the fiscal year ended June 27, 2015.
The following summaries of each of the agreements listed above are qualified in their entireties by reference to these agreements, which are incorporated by
reference into this Annual Report on Form10-K.
The Contribution Agreement
Transfer of Assets and Assumption of Liabilities
On July 31, 2015, we entered into a contribution agreement with Viavi, which identifies the assets transferred, the liabilities assumed and the contracts
assigned to each of Lumentum and Viavi, and it provides for when and how these transfers, assumptions and assignments will occur. In particular, the contribution
agreement provides that, among other things, subject to the terms and conditions contained therein:
•
all assets primarily used by our business, which are referred to as “Lumentum Assets,” are transferred to us, including, among others:
• manufacturing facilities located in San Jose, California and Bloomfield, Connecticut;
•
•
•
•
•
R&D facilities primarily located in the United States, Canada, China and Switzerland;
contracts (or portions thereof) related to our business;
intellectual property related to our business;
rights and assets expressly allocated to us pursuant to the terms of the separation agreement or certain other agreements entered into in
connection with the Separation; and
other assets that are included in our pro forma balance sheet.
•
•
•
certain liabilities primarily related to our business or the Lumentum Assets, which are referred to as the “Lumentum Liabilities,” were also
transferred;
all of the assets and liabilities (including whether accrued, contingent or otherwise) other than the Lumentum Assets and the Lumentum Liabilities
(such assets and liabilities referred to as the “JDSU Assets” and the “JDSU Liabilities,” respectively) were retained by or transferred to Viavi; and
certain contingent liabilities, unless specifically attributable to either us or Viavi, will be allocated between the two parties according to a formula to
be agreed upon by the two parties.
Except as expressly set forth in the contribution agreement or any ancillary agreement, neither we nor Viavi make any representation or warranty as to the
assets, business or liabilities transferred or assumed as part of the contribution, as to any approvals or notifications required in connection with the transfers, as to
the value of or the freedom from any security interests of any of the assets transferred, as to the absence of any defenses or right of setoff or freedom from
counterclaim with respect to any claim or other asset of either our subsidiaries or Viavi or as to the legal sufficiency of any assignment, document or instrument
delivered to convey title to any asset or thing of value to be transferred in connection with the Separation. All assets are transferred on an “as is,” “where is” basis
and the respective transferees will bear the economic and legal risks that any conveyance will prove to be insufficient to vest in the transferee good title, free and
clear of all security interests, and that any necessary approvals or notifications are not obtained or made or that any requirements of laws or judgments are not
complied with.
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Information in this Annual Report on Form 10-K with respect to the assets and liabilities of the parties distributed in connection with the Separation is
presented based on the allocation of such assets and liabilities pursuant to the separation agreement and the ancillary agreements, unless the context otherwise
requires. The contribution agreement provides that, in the event that the transfer or assignment of certain assets and liabilities to Lumentum Operations LLC or
Viavi, as applicable, does not occur prior to the contribution, then until such assets or liabilities are able to be transferred or assigned, Lumentum Operations LLC
or Viavi, as applicable, will hold such assets on behalf and for the benefit of the other party and will pay, perform and discharge such liabilities in the ordinary
course of business, provided that the other party will advance or reimburse Lumentum Operations LLC or Viavi, as applicable, for any payments made in
connection with the maintenance of such assets or the performance and discharge of such liabilities.
The Membership Interest Transfer Agreement
On July 31, 2015, Viavi and Lumentum Inc. entered into a membership interest transfer agreement which provided that Viavi would transfer all of the
membership interests in Lumentum Operations LLC, which holds what was historically Viavi's CCOP business assets and associated liabilities, to Lumentum Inc.
in exchange for all of the issued and outstanding common stock, Series A Preferred Stock (which Viavi subsequently sold to Amada) and Series B Preferred Stock
of Lumentum Inc.
The Separation and Distribution Agreement
Contribution of Operating Subsidiary Common Stock and Series B Preferred Stock
On July 31, 2015, we entered into a separation agreement with Viavi that provided that Viavi would contribute all of the issued and outstanding common
stock and Series B Preferred Stock of Lumentum Inc., which holds all of the membership interests in Lumentum Operations LLC, which in turn holds what was
historically Viavi's CCOP business assets and associated liabilities, to us.
The Cash Contribution
The separation agreement provides that, prior to the distribution, Viavi will make a cash contribution to Lumentum in an amount equal to $127.0 million so
that our total cash amount will be $137.6 million.
The Distribution
The separation agreement also governs the rights and obligations of the parties regarding the distribution. On July 31, 2015, after giving effect to Viavi’s
retention of 19.9% of our common stock, Viavi distributed to its stockholders that held shares of Viavi common stock as of July 27, 2015 the remaining 80.1% of
the issued and outstanding shares of our common stock on a pro rata basis. Viavi stockholders received cash in lieu of any fractional shares of our common stock.
Conditions to the Distribution
The separation agreement provides that the distribution was subject to satisfaction (or waiver by Viavi) of certain conditions. Viavi had the sole and absolute
discretion to determine (and change) the terms of, and to determine whether to proceed with, the distribution and to determine the record date for the distribution,
the distribution date and the distribution ratio.
Termination of Arrangements and Agreements between us and Viavi
The separation agreement provides that all agreements, arrangements, commitments or understandings as to which there are no third parties and that are
between us, on the one hand, and Viavi, on the other hand, as of July 31, 2015, will be terminated as of the distribution, except for the separation agreement and the
ancillary agreements, certain shared contracts and other arrangements specified in the separation agreement. The separation agreement also provides that at or prior
to July 31, 2015, all bank and brokerage accounts owned by us were de-linked from the Viavi accounts.
Releases
The contribution agreement provides that we and our affiliates will release and discharge Viavi and its affiliates from all liabilities to the extent existing or
arising from any acts and events occurring or failing to occur, and all conditions existing, prior to the effective time of the contribution, including in connection
with the implementation of the contribution, except as expressly set forth in the contribution agreement. The separation agreement provides that Viavi and its
affiliates will release and discharge us and our affiliates from all liabilities to the extent existing or arising from any acts and events occurring or failing to occur,
and all conditions existing, prior to the effective time of the contribution, including in connection with the implementation of the contribution, except as expressly
set forth in the contribution agreement.
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These releases do not extend to obligations or liabilities under any agreements between the parties that remain in effect following the contribution, which
agreements include, but are not limited to, the contribution agreement, the supply agreement, the tax matters agreement, the employee matters agreement, the
intellectual property matters agreement, the escrow agreement and the local transfer documents executed in connection with the Separation.
Indemnification
In the contribution agreement, we agree to indemnify, defend and hold harmless Viavi, each of its affiliates and each of their respective directors, officers and
employees, from and against all liabilities relating to, arising out of or resulting from:
•
•
•
•
•
any Lumentum Liabilities;
the failure of on our part to pay, perform or otherwise promptly discharge any Lumentum Liabilities or Lumentum contracts, in accordance with
their respective terms, whether prior to or after the effective time of the distribution;
any guarantee, indemnification obligation, surety bond or other credit support agreement, arrangement, commitment or understanding by Viavi for
our benefit, unless related to a JDSU Liability;
any breach by us of the contribution agreement or any of the ancillary agreements or any action by us in contravention of our amended and restated
certificate of incorporation or amended and restated bylaws; and
any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, with respect to all information contained in the registration statement of which
the information statement dated as of July 16, 2015 related to the Separation forms a part (the "Information Statement"), the Information Statement
(as amended or supplemented) or any other disclosure document that describes the Separation, the contribution or the distribution or primarily
relates to the transactions contemplated by the contribution agreement, other than any such statement or omission specifically relating to the JDSU
Assets, the JDSU Liabilities or Viavi or its subsidiaries (other than us and our subsidiaries).
Viavi agrees to indemnify, defend and hold us harmless, along with each of our affiliates and all respective directors, officers and employees from and
against all liabilities relating to, arising out of or resulting from:
•
•
•
•
•
the JDSU Liabilities;
the failure of Viavi or any of its subsidiaries, other than us, to pay, perform or otherwise promptly discharge any of the JDSU Liabilities, in
accordance with their respective terms, whether prior to or after the effective time of the distribution;
any guarantee, indemnification obligation, surety bond or other credit support agreement, arrangement, commitment or understanding by us for the
benefit of Viavi, unless related to a Lumentum Liability;
any breach by Viavi or any of its subsidiaries, other than us, of the contribution agreement or any of the ancillary agreements; and
any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, with respect to information contained in the registration statement of which the
Information Statement forms a part, the Information Statement (as amended or supplemented) or any other disclosure document that describes the
Separation or the distribution or primarily relates to the transactions contemplated by the contribution agreement, but only to the extent specifically
relating to the JDSU Assets, the JDSU Liabilities or Viavi or its subsidiaries (other than us and our subsidiaries).
The contribution agreement also establishes procedures with respect to claims subject to indemnification and related matters. Indemnification with respect to
taxes will be governed solely by the tax matters agreement. Neither party’s indemnification obligations are subject to maximum loss clauses.
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Legal Matters
Each party to the contribution agreement generally will assume the liability for, and control of, all pending and threatened legal matters primarily related to
its own business, and indemnify the other party for any liability arising out of or resulting from such assumed legal matters.
Insurance
The contribution agreement provides for the allocation between the parties of rights and obligations under existing insurance policies with respect to
occurrences prior to the distribution and sets forth procedures for the administration of insured claims. In addition, the separation agreement allocates between the
parties the right to proceeds and the obligation to incur certain deductibles under certain insurance policies.
Further Assurances
In addition to the actions specifically provided for in the contribution agreement, we and Viavi agree to use commercially reasonable efforts, prior to, on and
after the distribution date, to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws,
regulations and agreements to consummate and make effective the transactions contemplated by the separation agreement and the ancillary agreements.
Dispute Resolution
The contribution agreement contains provisions that govern, except as otherwise provided in certain ancillary agreements, the resolution of disputes,
controversies or claims that may arise between us and Viavi related to such agreements, and the contribution. These provisions contemplate that efforts will be
made to resolve disputes, controversies and claims first by escalation of the matter to our senior management or Viavi senior management, before availing
themselves of any other remedies. The parties may also jointly select a mediator, whose opinion shall be strictly advisory and nonbinding, to assist them in their
discussions and negotiations.
Expenses
Except as expressly set forth in the separation agreement or in any ancillary agreement, Viavi will be responsible for payment of all out-of-pocket fees, costs
and expenses incurred in connection with the Separation and distribution prior to July 31, 2015, including costs and expenses relating to legal and tax counsel,
financial advisors and accounting advisory work related to the Separation and distribution. Except as expressly set forth in the separation agreement or in any
ancillary agreement, or as otherwise agreed in writing by us and Viavi, all such fees, costs and expenses incurred in connection with the Separation and distribution
after the effective time of the distribution will be paid by the party incurring such fee, cost or expense.
Other Matters
Other matters governed by the separation agreement and certain ancillary agreements include access to financial and other information, confidentiality,
access to and provision of witnesses and records, certain environmental matters and treatment of outstanding guarantees.
Termination
The separation agreement provides that it may be terminated, and the Separation and distribution may be abandoned, at any time prior to the effective time of
the distribution in the sole discretion of Viavi without the approval of any person, including our stockholders or Viavi’s stockholders. In the event of a termination
of the separation agreement, no party, nor any of its directors or officers, will have any liability of any kind to the other party or any other person. After the
effective time of the distribution, the separation agreement may not be terminated except by an agreement in writing signed by us and Viavi.
Tax Matters Agreement
On July 31, 2015, we entered into a tax matters agreement with Viavi that will govern the respective rights, responsibilities and obligations of Viavi and us
after the distribution with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. federal, state, local and foreign
income taxes, other taxes and related tax returns. The tax matters agreement generally will provide that all tax liabilities of Viavi resulting from the failure of the
spin-off to qualify as tax-free shall be apportioned between Viavi and us, except that such tax liabilities incurred as a result of an action, omission or breach of
certain covenants shall be allocated to us. The tax matters agreement will provide for certain covenants that may restrict our ability to pursue strategic or other
transactions that otherwise could maximize the value of our business and may discourage or delay a
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change of control that you may consider favorable. Though valid as between the parties, the tax matters agreement will not be binding on the tax authorities. As a
wholly-owned subsidiary of Viavi, we have (and will continue to have following the distribution) several liability with Viavi to the IRS and certain state tax
authorities for the consolidated U.S. federal and combined state and local income taxes of the Viavi consolidated group relating to the taxable periods in which we
were part of that group.
Employee Matters Agreement
On July 31, 2015, we also entered into an employee matters agreement with Viavi to allocate liabilities and responsibilities relating to employment matters,
employee compensation and benefits arrangements, and other related matters in connection with the contribution. The employee matters agreement provides that
employees engaged in the Lumentum business will transfer to Lumentum and employees engaged in the Viavi business will remain with or transfer to Viavi, as
applicable.
The employee matters agreement also provides that generally, liabilities relating to Lumentum employees will transfer to Lumentum and liabilities relating to
Viavi employees will remain with Viavi.
Compensation and Benefits Plans
Generally and subject to certain exceptions, Lumentum will provide its employees with compensation and benefit plans that are substantially similar to the
corresponding Viavi compensation and benefit plans. Lumentum will credit each employee with service to Viavi prior to the contribution for all purposes under the
Lumentum benefit plans to the same extent such service was recognized by Viavi for similar purposes and so long as such crediting does not result in a duplication
of benefits.
Retirement and Deferred Compensation Programs
Lumentum has established a qualified defined contribution retirement plan for allocated employees. In connection with the contribution, assets, liabilities and
account balances (as applicable) of Lumentum employees contained in the Viavi qualified defined contribution retirement plan may either be transferred to
Lumentum or Lumentum plans, as applicable or if permitted under the terms of the plan be distributed to Lumentum employees. Viavi plans will retain assets,
liabilities and account balances of Viavi employees. As soon as practicable following the distribution, Lumentum expects to establish a non-qualified deferred
compensation plan to which the assets allocated to Lumentum employees participating in the Viavi non-qualified deferred compensation plan will be transferred.
Welfare Plans
With regard to certain specified account based medical benefits, we assumed liability for claims that may be made by Lumentum employees for services
performed following the Separation.
Equity Compensation Awards
The employee matters agreement provides for the treatment, as of the distribution, of all outstanding awards granted under Viavi’s equity award plans. Viavi
equity awards held by our employees prior to the distribution were converted into awards relating to shares of our common stock and adjusted to reflect the
distribution in order to preserve their economic value, as described in the section entitled “Executive Compensation-Treatment of Equity Awards at Separation.”
Intellectual Property Matters Agreement
On July 31, 2015, we entered into an intellectual property matters agreement with Viavi pursuant to which (i) Viavi conveyed to us the intellectual property
rights and technology primarily used in the Lumentum business, and (ii) Viavi licensed to us certain intellectual property and technology owned or controlled by
Viavi. We also licensed to Viavi certain intellectual property and technology owned or controlled by us. In addition, Viavi granted us a transitional, non-exclusive
license to use certain of Viavi’s marks in connection with our corporate identity materials, licensed products, collateral material and marketing materials.
We entered into non-compete restrictions with Viavi that appropriately restrict each of (i) Lumentum from the manufacture, supply, distribution, sale, support
(including consulting and other services) and maintenance of any products or services in certain Viavi markets; and (ii) Viavi from the manufacture, supply,
distribution, sale, support (including consulting and other services) and maintenance of any products or services in certain Lumentum markets.
Stockholder’s and Registration Rights Agreement
On July 31, 2015, we entered into a stockholder’s and registration rights agreement with Viavi pursuant to which we agreed that, upon the request of Viavi,
we will effect the registration under applicable federal and state securities laws of the shares of our common stock retained by Viavi after the distribution. In
addition, Viavi will grant us a proxy to vote the shares of our common
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stock that Viavi retains immediately after the distribution in proportion to the votes cast by our other stockholders. This proxy, however, will be automatically
revoked as to a particular share upon any sale or transfer of such share from Viavi to a person other than Viavi, and neither the voting agreement nor the proxy will
limit or prohibit any such sale or transfer.
Securities Purchase Agreement
Only July 31, 2015, we entered into a securities purchase agreement with Viavi, Lumentum Inc., and Amada pursuant to which Viavi, on August 19, 2015,
sold 35,805 shares of Lumentum Inc.’s nonvoting Series A Preferred Stock to Amada for $35.8 million.
The Series A Preferred Stock may be converted into shares of our common stock commencing on the second anniversary of the closing of the securities
purchase (absent a change of control of us or similar event) using a conversion price calculated equal to 125 percent of the volume weighted average price per
share of our common stock in the five “regular-way” trading days following the spin-off. The Series A Holders will be entitled to certain demand and “piggyback”
registration rights.
Cumulative senior dividends on the Series A Preferred Stock will accrue at the annual rate of 2.5 percent, but will be paid only when and if declared by our
board of directors. If Lumentum Inc. is in arrears on the payment of dividends to the Series A Preferred Stock stockholders, (i) Lumentum Inc. will not be able to
pay any dividends, subject to certain exceptions, and (ii) we will not be able to make any distribution on or repurchase of our common stock.
The Series A Preferred Stock is senior to all other classes or series of capital stock of Lumentum Inc. Lumentum Inc. is prohibited from issuing any capital
stock ranking senior to the Series A Preferred Stock without the prior consent of the holders of a majority of the Series A Preferred Stock. The Series A Preferred
Stock may be redeemed by us upon the third anniversary of the date of issuance or the preferred stockholders may cause us to redeem the Series A Preferred Stock
upon the fifth anniversary of the date of issuance.
Supply Agreement
On July 31, 2015, we entered into a supply agreement with Viavi pursuant to which Viavi will supply test equipment to Lumentum and Lumentum will
supply components related to the metro, fiber, and optical product lines and development services related to smart transceivers to Viavi. All products will be sold
with warranties that are consistent with Viavi’s practices prior to July 31, 2015.
Escrow Agreement
On July 31, 2015, we entered into an escrow agreement with Viavi and an independent third-party escrow agent pursuant to which the escrow agent will
maintain a copy of certain information that is considered confidential to us and Viavi. The escrow agent will release some or all of such confidential information to
us or Viavi upon certain conditions, including to the extent that either of us require access to such information to respond to a governmental or regulatory
investigation, litigation or other proceeding related to such information and each of us will be subject to customary restrictions on use or disclosure of such
information other than as permitted by the escrow agreement.
Other Relationships and Related Person Transactions
Jeff von Richter is a Supply Chain Manager at Lumentum, and was employed by Viavi since 2013. Mr. von Richter is the brother-in-law of Alan Lowe, our
president and chief executive officer. For the fiscal year ended June 27, 2015, Mr. von Richter’s total compensation, including salary, bonus, 401(k) matching and
the amount of stock-based compensation determined pursuant to accounting rule FASB ASC Topic 718, excluding the effect of estimated forfeitures, was
approximately $180,000. Mr. von Richter will also be eligible to participate in employee benefit plans generally available to our employees.
Procedures for Approval of Related Person Transactions
On August 3, 2015, our board of directors adopted a written policy under which our audit committee must review and approve or disapprove of all related
person transactions that are required to be disclosed under SEC Regulation S-K, Item 404(a), unless such transaction has otherwise been approved by a comparable
committee or our entire board of directors. Prior to entering into a transaction with our company, directors and executive officers (and their family members) and
stockholders who beneficially own more than 5% of our common stock are required to make full disclosure of all facts and circumstances to our legal department.
The legal department will then determine whether such transaction requires the approval of our audit committee. Our audit committee will consider all of the
relevant facts available, including (if applicable) but not limited to: the benefits to us; the impact on a director’s independence in the event the person in question is
a director, an immediate family member of a director or an entity in which a director is a partner, stockholder, or executive officer; the availability of other sources
for comparable products or services; the terms of the transaction; and the terms available to unrelated third parties or to employees generally. Our audit
100
committee will approve only those related person transactions that are in, or are not inconsistent with, the best interests of our company and our stockholders.
We review all relationships and transaction in which we and our directors and executive officers or their immediate family members are participants to
determine whether such persons have a direct or indirect material interest. Our legal staff is primarily responsible for the development and implementation of
processes and controls to obtain information from the directors and executive officers with respect to related person transactions and for then determining, based on
the facts and circumstances, whether we or a related person has a direct or indirect material interest in the transaction. On an annual basis, all directors and
executive officers must respond to a questionnaire requiring disclosure about any related person transactions, arrangements or relationships (including
indebtedness). As required under SEC rules, any transactions that are determined to be directly or indirectly material to us or a related person will be disclosed in
our proxy statement. Our audit committee reviews and approves or ratifies any related person transaction that is required to be disclosed. This review and approval
process is evidenced in the minutes of the audit committee meetings.
101
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The audit committee of our board of directors has appointed PricewaterhouseCoopers LLP (“PWC”) as our independent registered public accounting firm for
the fiscal year ending July 2, 2016.
The following table presents fees for professional audit services rendered to Viavi by PWC for the years ended June 28, 2014 and June 27, 2015, and fees
billed for other services rendered to Viavi by PWC, for those periods. Prior to the Separation, Viavi paid all audit, audit-related, tax and other fees of PWC. As a
result, the amounts reported below are not necessarily representative of the fees Lumentum would expect to pay its auditors and their related affiliates in future
years.
Audit Fees (1)..........................................................
Audit-Related Fees (2)............................................
Tax Fees (3).............................................................
All Other Fees (4)....................................................
Total....................................................................
Fiscal 2015
Fiscal 2014
5,442,605
—
501,785
100,165
6,044,555
3,272,638
230,761
366,613
50,600
3,920,612
______________________
(1) Audit Fees related to professional services rendered in connection with the audit of Viavi's annual financial statements, the audit of internal control over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, reviews of financial statements included in Viavi's Quarterly
Reports on Form 10-Q, and audit services provided in connection with other statutory and regulatory filings. Fiscal 2015 audit fees reflect additional fees
of $2,320,000 for services performed by PWC in connection with the Separation.
(2) Audit-Related Fees include assurance and related services provided for due diligence related to acquisitions, accounting consultations in connection with
acquisitions and consultations on corporate transactions.
(3) Tax Fees for fiscal 2015 include $87,310 for professional services rendered in connection with transfer pricing tax consulting and compliance, and
$414,475 for tax audits, planning services and other tax consulting, including additional fees of $397,000 for services performed by PWC in connection
with the Separation.
(4) All Other Fees in fiscal 2015 are related to the annual Workforce Engagement Survey and other non-audit related services.
For fiscal year 2015, the Viavi Audit Committee considered whether audit-related services and services other than audit-related services provided by PWC
are compatible with maintaining the independence of PWC and concluded that the independence of PWC was maintained.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The audit committee pre-approves all audit and permissible non-audit services provided by our independent auditors. These services may include audit
services, audit-related services, tax services and other services. The audit committee has adopted a policy for the pre-approval of services provided by our
independent auditors. Under the policy, pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. In addition,
the audit committee may also pre-approve particular services on a case-by-case basis. For each proposed service, our independent auditors are required to provide
detailed back-up documentation at the time of approval.
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Table of Contents
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following items are filed as part of this Annual Report on Form 10-K:
(1)
Financial Statements:
PART IV
Report of Independent Registered Public Accounting Firm
Combined Statements of Operations—Years Ended June 27, 2015, June 28, 2014 and June 29, 2013
Combined Statements of Comprehensive (Loss) Income—Years Ended June 27, 2015, June 28, 2014 and June 29, 2013
Combined Balance Sheets—June 27, 2015 and June 28, 2014
Combined Statements of Cash Flows—Years Ended June 27, 2015, June 28, 2014 and June 29, 2013
Combined Statements of Invested Equity—Years Ended June 27, 2015, June 28, 2014 and June 29, 2013
Notes to Combined Financial Statements
(2)
Financial Statement Schedules:
Page
46
47
48
49
50
51
52
The following additional financial statement schedule should be considered in conjunction with our combined financial statements. All other financial
statement schedules have been omitted because the required information is not present in amounts sufficient to require submission of the schedule, not applicable,
or because the required information is included in the Combined Financial Statements or Notes thereto.
103
Table of Contents
LUMENTUM HOLDINGS INC.
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A
Column B
Column C
Column D
Column E
Description
2015
Deferred tax valuation allowance
2014
Deferred tax valuation allowance
2013
Deferred tax valuation allowance
Balance at
Beginning of Period
Additions Charged to
Expenses or Other
Accounts*
Deductions Credited to
Expenses or Other
Accounts**
Balance at End of
Period
$
$
$
184.6 $
215.3 $
255.3 $
(in millions)
3.4 $
1.5 $
1.5 $
(28.0)
$
(32.2)
$
(41.5)
$
160.0
184.6
215.3
* Additions include current year additions charged to expenses and current year build due to increases in net deferred tax assets, return to provision true-
ups, other adjustments to deferred taxes.
** Deductions include current year releases credited to expenses and current year reductions due to decreases in net deferred tax assets, return to provision
true-ups, other adjustments to deferred taxes.
(3) Exhibits:
See Item 15(b)
104
Table of Contents
(b) Exhibits:
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission.
105
Table of Contents
Exhibit No.
Exhibit Description
Incorporated by Reference
Filed
Form
Exhibit
Filing Date
Herewith
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
S-8
S-8
8-K
8-K
2.1
2.2
2.3
3.1
3.2
4.1
10.1
10.2
10.3
99.1
99.2
10.5
10.4
8/6/2015
8/6/2015
8/6/2015
8/6/2015
8/6/2015
8/6/2015
8/6/2015
8/6/2015
8/6/2015
7/29/2015
7/29/2015
8/6/2015
8/6/2015
3
2.1
2.2
2.3
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
21.1
23.1
31.1
31.2
Contribution Agreement
Membership Interest Transfer Agreement
Separation and Distribution Agreement
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Stockholder's and Registration Rights Agreement
Tax Matters Agreement
Employee Matters Agreement
Intellectual Property Matters Agreement
2015 Equity Incentive Plan
2015 Employee Stock Purchase Plan
Change in Control and Severance Benefits Plan
Employment Agreement for Alan Lowe
Form of Indemnification Agreement
Subsidiaries of Lumentum Holdings Inc.
Consent of Independent Registered Public Accounting Firm
(PricewaterhouseCoopers LLP)
Certification of the Chief Executive Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32.1*
32.2*
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**
XBRL Instance
101.SCH**
XBRL Taxonomy Extension Schema
101.CAL**
XBRL Taxonomy Extension Calculation
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
XBRL Taxonomy Extension Label Linkbase
101.PRE**
XBRL Taxonomy Extension Presentation
X
X
X
X
X
X
X
X
X
X
X
X
X
* The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed "filed"
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated by reference into any
filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically
incorporates it by reference.
** Furnished herewith.
106
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 25, 2015
LUMENTUM HOLDINGS INC.
By: /s/ Aaron Tachibana
By: Aaron Tachibana
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Aaron Tachibana and
Judy Hamel, and each of them individually, as his or her attorney-in-fact, each with full power of substitution, for him or her in any and all capacities to sign any
and all amendments to this Annual Report on Form 10-K, and to file the same with, with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his or her substitute, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature
/s/ ALAN LOWE
Alan Lowe
President, Chief Executive Officer and Director
Title
/s/ AARON TACHIBANA
Chief Financial Officer
Aaron Tachibana
/s/ HAROLD COVERT
Director
Harold Covert
/s/ PENELOPE HERSCHER
Director
Penelope Herscher
/s/ MARTIN KAPLAN
Chairman
Martin Kaplan
/s/ BRIAN LILLIE
Brian Lillie
Director
/s/ SAMUEL THOMAS
Director
Samuel Thomas
Date
September 25, 2015
September 25, 2015
September 25, 2015
September 25, 2015
September 25, 2015
September 25, 2015
September 25, 2015
107
This INDEMNIFICATION AGREEMENT , dated ___________, is made between Lumentum Holdings Inc., a Delaware
corporation (the “ Company
”), and __________ (the “ Indemnitee
”).
INDEMNIFICATION AGREEMENT
RECITALS
A.
The Company desires to attract and retain the services of talented and experienced individuals, such as Indemnitee, to
serve as directors and officers of the Company and its subsidiaries and wishes to indemnify its directors and officers to the maximum extent
permitted by law;
B. The Company and Indemnitee recognize that corporate litigation in general has subjected directors and officers to expensive
litigation risks;
C. Section 145 of the General Corporation Law of Delaware, under which the Company is organized (“ Section
145
”), empowers
the Company to indemnify its directors and officers by agreement and to indemnify persons who serve, at the request of the Company, as the
directors and officers of other corporations or enterprises, and expressly provides that the indemnification provided by Section 145 is not
exclusive;
D. Section 145(g) allows for the purchase of management liability (“ D&O
”) insurance by the Company, which in theory can
cover asserted liabilities without regard to whether they are indemnifiable by the Company or not;
E. Individuals considering service or presently serving as directors or officers, or in other indemnifiable capacities, expect to be
extended market terms of indemnification commensurate with their position, and that entities such as Company will endeavor to maintain
appropriate D&O insurance; and
F. In order to induce Indemnitee to serve or continue to serve as a director or officer of the Company and/or one or more
subsidiaries of the Company, or otherwise serve the Company in an indemnifiable capacity as set forth below, the Company and Indemnitee
enter into this Agreement.
NOW, THEREFORE, Indemnitee and the Company hereby agree as follows:
1. Definitions . As used in this Agreement:
AGREEMENT
(a) “ Agent
” means any person who is or was a director, officer, employee or other agent of the Company or a subsidiary
of the Company; or is or was serving at the request of, for the convenience of, or to represent the interests of the Company or a subsidiary of
the Company as a director, officer, employee or agent of another foreign or domestic corporation, limited liability company, employee benefit
plan, nonprofit entity, partnership, joint venture, trust or other enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a subsidiary of the Company, or was a director, officer,
employee or agent of another enterprise at the request of, for the convenience of, or to represent the interests of such predecessor corporation.
(b) “ Board
” means the Board of Directors of the Company.
1
(c) A “ Change
in
Control
” shall be deemed to have occurred if (i) any “person,” as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company, is or becomes the “beneficial owner” (as defined in Rule
13d‑3 under the Exchange Act), directly or indirectly, of securities of the Company representing 40% or more of the total voting power
represented by the Company’s then outstanding voting securities, (ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board, together with any new directors whose election by the Board or nomination for election by
the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination was previously so approved, cease for any reason to constitute a majority of the
Board, (iii) the stockholders of the Company approve a merger or consolidation or a sale of all or substantially all of the Company’s assets
with or to another entity, other than a merger, consolidation or asset sale that would result in the holders of the Company’s outstanding voting
securities immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of
the surviving entity) at least a majority of the total voting power represented by the voting securities of the Company or such surviving or
successor entity outstanding immediately thereafter, and such merger, consolidation or sale is not abandoned (iv) the stockholders of the
Company approve a plan of complete liquidation of the Company and such plan is not abandoned, or (v) any other event of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Exchange Act, whether or not the Company is then subject to such reporting requirement.
(d) “ Expenses
” shall include all out‑of‑pocket costs of any type or nature whatsoever (including, without limitation, all
attorneys’ fees and related disbursements), actually and reasonably incurred by Indemnitee in connection with either the investigation,
defense, or appeal of a Proceeding, or establishing or enforcing a right to indemnification under this Agreement, or Section 145 or otherwise;
provided , however , that “Expenses” shall not include any judgments, fines, ERISA excise taxes or penalties, or amounts paid in settlement
of a Proceeding.
(e) “ Independent
Counsel
” means a law firm, or a partner (or, if applicable, member) of such a law firm, that is
experienced in relevant matters of corporation law and neither currently is, nor in the past five years has been, retained to represent: (i) the
Company or Indemnitee in any matter material to either such party or (ii) any other party to or witness in the proceeding giving rise to a claim
for indemnification hereunder. But “Independent Counsel” shall not include any person who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine
Indemnitee’s rights under this Agreement. Where Independent Counsel is required to be retained by this Agreement, such Independent
Counsel shall be retained at the Company’s sole expense.
(f) “ Proceeding
” means any threatened, pending, or completed action, claim, suit, arbitration, alternate dispute resolution
mechanism, investigation, administrative hearing, or any other proceeding whether formal or informal, civil, criminal, administrative, or
investigative, including any such investigation or proceeding instituted by or on behalf of the Corporation or the Board, in which Indemnitee
is or reasonably may be involved as a party or target, that is associated with Indemnitee’s being an Agent of the Corporation.
(g) “ Subsidiary
” means any corporation of which more than 50% of the outstanding voting securities is owned directly or
indirectly by the Company, by the Company and/or one or more other subsidiaries.
2
2. Agreement to Serve . Indemnitee agrees to serve and/or continue to serve as an Agent of the Company, at its will (or under
separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an Agent of the Company, so long as Indemnitee
is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or any subsidiary of the
Company or until such time as Indemnitee tenders his or her resignation in writing; provided , however , that nothing contained in this
Agreement is intended to create any right to continued employment or other service by Indemnitee.
3. Liability Insurance .
(a) Maintenance of D&O Insurance . The Company hereby covenants and agrees that, so long as Indemnitee shall continue
to serve as an Agent of the Company and thereafter so long as Indemnitee shall be subject to any possible Proceeding by reason of the fact
that Indemnitee was an Agent of the Company, the Company, subject to Section 3(c), shall promptly obtain and maintain in full force and
effect directors’ and officers’ liability insurance (“ D&O
Insurance
”) in reasonable amounts from established and reputable insurers of a
minimum A.M. Best rating of A- VII, and as more fully described below. In the event of a Change in Control, the Company shall, as set forth
in Section (c) below, either: i) maintain such D&O Insurance for six years following a Change of Control; or ii) purchase a six year tail for
such D&O Insurance. Should a tail policy be purchased, reasonable efforts shall be made to try to obtain the coverage through Company’s
D&O insurance broker at that time, and under the same or better terms and limits in place at that time.
(b) Rights and Benefits . In all policies of D&O Insurance, Indemnitee shall qualify as an insured in such a manner as to
provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s Agents who are serving in
the same capacity as Indemnitee.
(c) Limitation on Required Maintenance of D&O Insurance . Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain D&O Insurance at all, or of any type, terms, or amount, if the Company determines in good faith and after
using commercially reasonable efforts that: such insurance is not reasonably available; the premium costs for such insurance are
disproportionate to the amount of coverage provided; the coverage provided by such insurance is limited so as to provide an insufficient or
unreasonable benefit; Indemnitee is covered by similar insurance maintained by a subsidiary of the Company; or the Company is to be
acquired and a tail policy of reasonable terms and duration can be purchased for pre-closing acts or omissions by Indemnitee.
4. Mandatory Indemnification . Subject to the terms of this Agreement:
(a) Third Party Actions . If Indemnitee is a person who was or is a party or is threatened to be made a party to any
Proceeding (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was an Agent of the Company,
or by reason of anything done or not done by Indemnitee in any such capacity, the Company shall indemnify Indemnitee against all Expenses
and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of such
Proceeding, provided Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or Proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
(b) Derivative Actions . If Indemnitee is a person who was or is a party or is threatened to be made a party to any
Proceeding by or in the right of the Company by reason of the fact that Indemnitee is or was an Agent of the Company, or by reason of
anything done or not done by Indemnitee in any such capacity, the Company shall indemnify Indemnitee against all Expenses actually
3
and reasonably incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of such Proceeding, provided
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company;
except that no indemnification under this Section 4(b) shall be made in respect to any claim, issue or matter as to which Indemnitee shall have
been finally adjudged to be liable to the Company by a court of competent jurisdiction unless and only to the extent that the Delaware Court
of Chancery shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity for such amounts which the Delaware Court of Chancery or such other court shall
deem proper.
(c) Actions where Indemnitee is Deceased . If Indemnitee is a person who was or is a party or is threatened to be made a
party to any Proceeding by reason of the fact that Indemnitee is or was an Agent of the Company, or by reason of anything done or not done
by Indemnitee in any such capacity, and if, prior to, during the pendency of or after completion of such Proceeding Indemnitee is deceased,
the Company shall indemnify Indemnitee’s heirs, executors and administrators against all Expenses and liabilities of any type whatsoever to
the extent Indemnitee would have been entitled to indemnification pursuant to this Agreement were Indemnitee still alive.
(d) Certain Terminations . The termination of any Proceeding or of any claim, issue, or matter therein by judgment, order,
settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this
Agreement) of itself create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to
be in or not opposed to the best interests of the Company or, with respect to any criminal action or Proceeding, that Indemnitee had
reasonable cause to believe that Indemnitee’s conduct was unlawful.
(e) Limitations . Notwithstanding the foregoing provisions of Sections 4(a), 4(b), 4(c) and 4(d) hereof, but subject to the
exception set forth in Section 13 which shall control, the Company shall not be obligated to indemnify the Indemnitee for Expenses or
liabilities of any type whatsoever for which payment (and the Company’s indemnification obligations under this Agreement shall be reduced
by such payment) is actually made to or on behalf of Indemnitee, by the Company or otherwise, under a corporate insurance policy, or under
a valid and enforceable indemnity clause, right, by-law, or agreement; and, in the event the Company has previously made a payment to
Indemnitee for an Expense or liability of any type whatsoever for which payment is actually made to or on behalf of the Indemnitee from any
such source, Indemnitee shall return to the Company the amounts subsequently received by the Indemnitee from that source.
(f) Witness . In the event that Indemnitee is not a party or threatened to be made a party to a Proceeding, but is subpoenaed
(or given a written request to be interviewed by or provide documents or information to a government authority) in such a Proceeding by
reason of the fact that the Indemnitee is or was an Agent of the Company, or by reason of anything witnessed or allegedly witnessed by the
Indemnitee in that capacity, the Company shall indemnify the Indemnitee against all actually and reasonably incurred out of pocket costs
(including without limitation legal fees) incurred by the Indemnitee in responding to such subpoena or written request for an interview. As a
condition to this right, Indemnitee must provide notice of such subpoena or written request to the Company within 14 days of receipt of such
subpoena or written request, otherwise the Company’s obligation to pay such costs shall only attach for costs incurred from the date of notice.
5. Indemnification for Expenses in a Proceeding in Which Indemnitee is Wholly or Partly Successful .
4
(a) Successful Defense . Notwithstanding any other provisions of this Agreement, to the extent Indemnitee has been
successful, on the merits or otherwise, in defense of any Proceeding (including, without limitation, an action by or in the right of the
Company) in which Indemnitee was a party by reason of the fact that Indemnitee is or was an Agent of the Company at any time, the
Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by or on behalf of Indemnitee in connection with
the investigation, defense or appeal of such Proceeding.
(b) Partially Successful Defense . Notwithstanding any other provisions of this Agreement, to the extent that Indemnitee is
a party to any Proceeding (including, without limitation, an action by or in the right of the Company) in which Indemnitee was a party by
reason of the fact that Indemnitee is or was an Agent of the Company at any time and is successful, on the merits or otherwise, as to one or
more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually
and reasonably incurred by or on behalf of Indemnitee in connection with each successfully resolved claim, issue or matter.
(c) Dismissal . For purposes of this section and without limitation, the termination of any claim, issue or matter in such a
Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
(d) Contribution . If the indemnification provided in this Agreement is unavailable and may not be paid to Indemnitee,
then to the extent allowed by law, in respect of any threatened, pending or completed action, suit or proceeding in which the Company is
jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall contribute to the amount of
expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by
Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and Indemnitee on
the other hand from the transaction from which such action, suit or proceeding arose, and (ii) the relative fault of Company on the one hand
and of Indemnitee on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well
as any other relevant equitable considerations. The relative fault of the Company on the one hand and of Indemnitee on the other shall be
determined by reference to, among other things, the parties' relative intent, knowledge, access to information, active or passive conduct, and
opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. The Company agrees
that it would not be just and equitable if contribution pursuant to this section were determined by pro rata allocation or any other method of
allocation which does not take account of the foregoing equitable considerations.
(e) Settlements by Company . The Company shall not settle any action, claim, or Proceeding (in whole or in part) that
would impose any Expense, settlement, judgment, fine, penalty, or limitation on Indemnitee, without Indemnitee’s prior written consent,
which shall not be unreasonably withheld; provided, however, that, with respect to settlements requiring solely the payment of money either
by the Company or by Indemnitee for which the Company is obligated to reimburse Indemnitee promptly and completely, in either case
without recourse to Indemnitee, no such consent of Indemnitee shall be required. Indemnitee shall not settle any action, claim or Proceeding
(in whole or in part) that would impose any Expense, judgment, fine, penalty or limitation on the Company without the Company’s prior
written consent, such consent not to be unreasonably withheld.
6. Mandatory Advancement of Expenses .
(a) Subject to the terms of this Agreement and following notice pursuant to Section 7(a) below, the Company shall advance, interest
free, all Expenses reasonably incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any Proceeding to
which Indemnitee is a party or
5
is threatened to be made a party by reason of the fact that Indemnitee is or was an Agent of the Company (unless there has been a final
determination such that Indemnitee is not entitled to indemnification for such Expenses) upon receipt satisfactory documentation supporting
such Expenses. Such advances are intended to be an obligation of the Company to Indemnitee hereunder and shall in no event be deemed to
be a personal loan. S uch advancement of Expenses shall otherwise be unsecured and without regard to Indemnitee’s ability to repay. The
advances to be made hereunder shall be paid by the Company to Indemnitee within 30 days following delivery of a written request therefor
by Indemnitee to the Company, which request shall be delivered with such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to advancement (which shall include
without limitation reasonably detailed invoices for legal services, but with disclosure of confidential work product not required). The
Company shall discharge its advancement duty by, at its option, (a) paying such Expenses on behalf of Indemnitee, (b) advancing to
Indemnitee funds in an amount sufficient to pay such Expenses, or (c) reimbursing Indemnitee for Expenses already paid by Indemnitee. In
the event that the Company fails to pay Expenses as incurred by Indemnitee as required by this paragraph, Indemnitee may seek mandatory
injunctive relief (including without limitation specific performance) in Delaware Chancery Court to require the Company to pay Expenses as
set forth in this paragraph. If Indemnitee seeks mandatory injunctive relief pursuant to this paragraph, it shall not be a defense to enforcement
of the Company’s obligations set forth in this paragraph that Indemnitee has an adequate remedy at law for damages.
(b) Undertakings. Indemnitee shall qualify for advances upon the execution and delivery to the Company of this Agreement, which
constitutes an undertaking whereby Indemnitee promises to repay any amounts advanced if and to the extent that it shall ultimately be
determined that Indemnitee is not entitled to indemnification by the Company.
7. Notice and Other Indemnification Procedures .
(a) Notice by Indemnitee . Promptly after receipt by Indemnitee of notice of the commencement of or the threat of
commencement of any Proceeding, Indemnitee shall, if Indemnitee believes that indemnification with respect thereto may be sought from the
Company under this Agreement, notify the Company in writing of the commencement or threat of commencement thereof; provided ,
however , that a delay in giving such notice will not deprive Indemnitee of any right to be indemnified under this Agreement unless, and then
only to the extent that, the Company did not otherwise learn of the Proceeding and such delay is materially prejudicial to the Company; and,
provided , further , that notice will be deemed to have been given without any action on the part of Indemnitee in the event the Company is a
party to the same Proceeding and has notice thereof.
(b) Insurance . If the Company receives notice pursuant to Section 7(a) hereof of the commencement of a Proceeding that
may be covered under D&O Insurance then in effect, the Company shall give prompt notice of the commencement of such Proceeding to the
insurers in accordance with the procedures set forth in the respective policies.
(c) Defense . In the event the Company shall be obligated to pay the Expenses of any Proceeding against Indemnitee, the
Company shall be entitled to assume the defense of such Proceeding, with counsel selected by the Company and approved by Indemnitee
(which approval shall not be unreasonably withheld), upon the delivery to Indemnitee of written notice of the Company’s election so to do.
After delivery of such notice, and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Proceeding, provided that (i) Indemnitee
shall have the right to employ his or her own counsel in any such Proceeding at Indemnitee’s expense; and (ii) Indemnitee shall have the right
to employ his or her own counsel in any such Proceeding at the Company’s expense if (A)
6
the Company has authorized the employment of counsel by Indemnitee at the expense of the Company; (B) Indemnitee shall have reasonably
concluded based on the written advice of Indemnitee’s legal counsel that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense; or (C) the Company shall not, in fact, have employed counsel to assume the defense of such
Proceeding. In addition to all the requirements above, if the Company has D&O Insurance, or other insurance, with a panel counsel
requirement that may cover the matter for which indemnity is claimed by Indemnitee, then Indemnitee shall use such panel counsel or other
counsel approved by the insurers, unless there is an actual conflict of interest posed by representation by all such counsel, or unless and to the
extent Company waives such requirement in writing. Indemnitee and his counsel shall provide reasonable cooperation with such insurer on
request of the Company.
8. Right to Indemnification .
(a) Right to Indemnification . In the event that Section 5(a) is inapplicable, the Company shall indemnify Indemnitee
pursuant to this Agreement unless, and except to the extent that, it shall have been determined by one of the methods listed in Section 8(b)
that Indemnitee has not met the applicable standard of conduct required to entitle Indemnitee to such indemnification.
(b) Determination of Right to Indemnification . A determination of Indemnitee’s right to indemnification under this
Section 8 shall be made at the election of the Board by (i) a majority vote of directors who are not parties to the Proceeding for which
indemnification is being sought, even though less than a quorum, or by a committee consisting of directors who are not parties to the
Proceeding for which indemnification is being sought, who, even though less than a quorum, have been designated by a majority vote of the
disinterested directors, or (ii) if there are no such disinterested directors or if the disinterested directors so direct, by Independent Counsel
chosen by the Company in a written opinion to the Board, a copy of which shall be delivered to Indemnitee. However, in the event there has
been a Change in Control, then the determination shall, at Indemnitee’s sole option, be made by Independent Counsel as in (b)(ii), above,
with Indemnitee choosing the Independent Counsel subject to Company’s consent, such consent not to be unreasonably withheld.
(c) Submission for Decision . As soon as practicable, and in no event later than 30 days after Indemnitee’s written request
for indemnification, the Board shall select the method for determining Indemnitee’s right to indemnification and as soon as is reasonably
practicable (but in any event not later than 30 days) after final disposition of the relevant Proceeding, a determination shall be made in
accordance with Section 7(b) with respect to Indemnitee’s entitlement to indemnification hereunder. If it is so determined that Indemnitee is
entitled to indemnification, payment to Indemnitee shall be made within 30 days after such determination. Indemnitee shall cooperate with
the person or persons or entity making such determination with respect to Indemnitee’s right to indemnification, including providing to such
person, persons or entity, upon reasonable advance request, any documentation or information which is not privileged or otherwise protected
from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel
or member of the Board shall act reasonably and in good faith in making a determination regarding Indemnitee’s entitlement to
indemnification under this Agreement.
(d) Application to Court . If (i) a claim for indemnification or advancement of Expenses is denied, in whole or in part, (ii)
no disposition of such claim is made by the Company within 60 days after the request therefore, (iii) the advancement of Expenses is not
timely made pursuant to Section 6 of this Agreement or (iv) payment of indemnification is not made pursuant to Section 5 of this Agreement,
Indemnitee shall have the right to apply to the Delaware Court of Chancery for the purpose of enforcing Indemnitee’s right to indemnification
(including the advancement of Expenses) pursuant to this Agreement. Upon written request by Indemnitee, the Company shall consent to
service of process.
7
(e) Expenses Related to the Enforcement or Interpretation of this Agreement . The Company shall indemnify Indemnitee
against all reasonable Expenses incurred by Indemnitee in connection with any hearing or proceeding under this Section 8 involving
Indemnitee, and against all reasonable Expenses incurred by Indemnitee in connection with any other proceeding between the Company and
Indemnitee to the extent involving the interpretation or enforcement of the rights of Indemnitee under this Agreement, if and to the extent
Indemnitee is successful.
(f) In no event shall Indemnitee’s right to indemnification (apart from advancement of Expenses) be determined prior to a
final adjudication (not subject to further appeal) in a Proceeding at issue if the Proceeding is both ongoing, and of the nature to have a final
adjudication (not subject to further appeal).
(g) In any proceeding to determine Indemnitee’s right to indemnification or advancement, Indemnitee shall be presumed to
be entitled to indemnification or advancement, with the burden of proof on the Company to prove, by a preponderance of the evidence (or
higher standard if required by relevant law) that Indemnitee is not so entitled.
(h) Indemnitee shall be fully indemnified for those matters where, in the performance of his duties for the Company, he
relied in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company
by any of the Company’s officers or employees, or committees of the Board, or by any other person as to matters Indemnitee reasonably
believed were within such other person's professional or expert competence and who was selected with reasonable care by or on behalf of the
Company.
9. Exceptions . Any other provision herein to the contrary notwithstanding, the Company shall not be obligated:
(a) Claims Initiated by Indemnitee . To indemnify or advance Expenses to Indemnitee with respect to Proceedings or
claims initiated or brought voluntarily by Indemnitee (including cross actions), unless (i) such indemnification is expressly required to be
made by law, (ii) the Proceeding was authorized by the Board, (iii) such indemnification is provided by the Company, in its sole discretion,
pursuant to the powers vested in the Company under the General Corporation Law of Delaware or (iv) the Proceeding is brought pursuant to
Section 8 specifically to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as
required under Section 145 in advance of a final determination, in which case the fees-on-fees provision in Section 8(e) shall control;
(b) Fees on Fees . To indemnify Indemnitee for any Expenses incurred by Indemnitee with respect to any Proceeding
instituted by Indemnitee to enforce or interpret this Agreement, to the extent Indemnitee is not successful in such a Proceeding;
(c) Unauthorized Settlements . To indemnify Indemnitee under this Agreement for any amounts paid in settlement of a
Proceeding unless the Company consents to such settlement, which consent shall not be unreasonably withheld or delayed;
(d) Claims Under Section 16(b) . To indemnify Indemnitee for Expenses associated with any Proceeding related to, or the
payment of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of
Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law (provided,
however, that the Company must advance Expenses for such matters as otherwise permissible under this Agreement);
8
(e) Payments Contrary to Law . To indemnify or advance Expenses to Indemnitee for which payment is prohibited by
applicable law; or
(f) Required Reimbursement . To indemnify Indemnitee for any reimbursement of the Company by Indemnitee of any
compensation, including bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale
of securities of the Company, as required in each case under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended (including without limitation reimbursements that (i) arise from an accounting restatement of the Company pursuant to Section
304 of the Sarbanes-Oxley Act of 2002, or the payment to the Company of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 306 of the Sarbanes-Oxley Act of 2002, or (ii) arise pursuant to regulations or policies adopted in
compliance with Section 954 of the Investor Protection and Securities Reform Act of 2010).
10. Non‑Exclusivity . The provisions for indemnification and advancement of Expenses set forth in this Agreement shall not be
deemed exclusive of any other rights which Indemnitee may have under any provision of law, the Company’s Certificate of Incorporation or
Bylaws, the vote of the Company’s stockholders or disinterested directors, other agreements, or otherwise, both as to action in Indemnitee’s
official capacity and as to action in another capacity while occupying Indemnitee’s position as an Agent of the Company. Indemnitee’s rights
hereunder shall continue after Indemnitee has ceased acting as an Agent of the Company and shall inure to the benefit of the heirs, executors
and administrators of Indemnitee.
11. Permitted Defenses . It shall be a defense to any action for which a claim for indemnification is made under this Agreement
(other than an action brought to enforce a claim for Expenses pursuant to Section 6 hereof, provided that the required documents have been
tendered to the Company) that Indemnitee is not entitled to indemnification because of the limitations set forth in Sections 4 and 9 hereof.
Neither the failure of the Company or an Independent Counsel to have made a determination prior to the commencement of such enforcement
action that indemnification of Indemnitee is proper in the circumstances, nor an actual determination by the Company or an Independent
Counsel that such indemnification is improper, shall be a defense to the action or create a presumption that Indemnitee is not entitled to
indemnification under this Agreement or otherwise. In making any determination concerning Indemnitee’s right to indemnification, there
shall be a presumption that Indemnitee has satisfied the applicable standard of conduct. Any determination by the Company concerning
Indemnitee’s right to indemnification that is adverse to Indemnitee may be challenged by the Indemnitee in the Court of Chancery of the
State of Delaware.
12. Subrogation . Subject to the limitations of Section 13, in the event the Company is obligated to make a payment under this
Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute
all documents reasonably required and take all action that may be necessary to secure such rights and to enable the Company effectively to
bring suit to enforce such rights (provided that the Company pays Indemnitee’s costs and expenses of doing so), including without limitation
by assigning all such rights to the Company or its designee to the extent of such indemnification or advancement of Expenses. The
Company’s obligation to indemnify or advance expenses under this Agreement shall be reduced by any amount Indemnitee has collected
from such other source, and in the event that Company has fully paid such indemnity or expenses, Indemnitee shall return to the Company
any amounts subsequently received from such other source of indemnification.
13. Primacy of Indemnification . The Company hereby acknowledges that Indemnitee may have certain rights to indemnification,
advancement of expenses, or liability insurance provided by a third-party investor and certain of its affiliates (collectively, the “ Investment
Entities
”). The Company
9
hereby agrees that (i) it is the indemnitor of first resort, i.e. , its obligations to Indemnitee under this Agreement and any indemnity provisions
set forth in its Certificate of Incorporation, Bylaws or elsewhere (collectively, “ Indemnity
Arrangements
”) are primary, and any obligation
of the Investment Entities to advance expenses or to provide indemnification for the same expenses or liabilities incurred by Indemnitee is
secondary and excess, (ii) it shall advance the full amount of expenses incurred by Indemnitee and shall be liable for the full amount of all
expenses, judgments, penalties, fines and amounts paid in settlement by or on behalf of Indemnitee, to the extent legally permitted and as
required by any Indemnity Arrangement, without regard to any rights Indemnitee may have against the Investment Entities, and (iii) it
irrevocably waives, relinquishes and releases the Investment Entities from any claims against the Investment Entities for contribution,
subrogation or any other recovery of any kind arising out of or relating to any Indemnity Arrangement. The Company further agrees that no
advancement or indemnification payment by any Investment Entity on behalf of Indemnitee shall affect the foregoing, and the Investment
Entities shall be subrogated to the extent of such advancement or payment to all of the rights of recovery of Indemnitee against the Company.
The Company and Indemnitee agree that the Investment Entities are express third party beneficiaries of the terms of this Section 13. The
Company, on its own behalf and on behalf of its insurers to the extent allowed by its insurance policies, waives subrogation rights against
Indemnitee and Investment Entities.
14. Information Sharing. If Indemnitee is the subject of or is implicated in any investigation, whether formal or informal, by a
government or regulatory entity or agency, the Company shall provide to Indemnitee any factual written information provided to the
investigating entity concerning the investigation; provided, that by executing this Agreement, Indemnitee agrees to use such information
solely in connection with the defense of such investigation and, if Indemnitee is not then serving the Company as an officer or director, shall
execute a confidentiality agreement. This section 14 shall not apply if either: a) a majority vote of the body set forth in Section 8(b) or, if a
Change in Control shall have occurred, then Independent Counsel, shall conclude that it is detrimental to the Company’s interests in that
investigation or any actual or threatened Proceeding for the Company to share such information; or b) such information sharing is prohibited
or limited by law or the order of any court of competent jurisdiction or applicable governmental or regulatory entity or agency.
15. Broadest Interpretation. In the event of any change after the date of this Agreement in law, statute, or rule which expands the
right Company to indemnify Indemnitee, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits afforded by such change. In the event of any change in law, statute, or rule which narrows the right of Company to indemnify
Indemnitee, such change, to the extent allowed by law, shall only apply to matters that relate to alleged acts, errors, or omissions of
Indemnitee that postdate such change.
16. No Imputation . The knowledge or actions, or failure to act, of any director, officer, employee, or agent of the Company, or the
Company itself shall not be imputed to Indemnitee for the purpose of determining Indemnitee’s rights hereunder.
17. Survival of Rights .
(a) This Agreement shall continue until and terminate upon the later of (i) ten years after the date that Indemnitee shall
have ceased to serve as an Agent of the Company; or (ii) one year after the final termination of any Proceeding, including any appeal, then
pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding
commenced by Indemnitee pursuant to Section 7 of this Agreement relating thereto.
(b) This Agreement shall be binding upon the Company and its successors (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the
10
business or assets of the Company, and shall inure to the benefit of Indemnitee and Indemnitee’s heirs, executors and administrators. The
Company shall require any successor to the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform if no such succession had taken place.
18. Interpretation of Agreement . It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as
to provide indemnification to Indemnitee to the fullest extent permitted by law, including those circumstances in which indemnification
would otherwise be discretionary.
19. Severability . If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any
reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including, without limitation, all
portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal, or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, such
remaining provisions shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal, or unenforceable.
20. Modification and Waiver . No supplement, modification, or amendment of this Agreement shall be binding unless it is in a
writing signed by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver
of any other provisions (even if similar) nor shall such waiver constitute a continuing waiver.
21. Notice . All notices, requests, demands and other communications under this Agreement shall be in writing and shall be
deemed to have been duly given (a) upon delivery if delivered by hand to the party to whom such notice or other communication shall have
been directed, (b) if mailed by certified or registered mail with postage prepaid, return receipt requested, on the third business day after the
date on which it is so mailed, (c) one business day after the business day of deposit with a nationally recognized overnight delivery service,
specifying next day delivery, with written verification of receipt, or (d) on the same day as delivered by confirmed facsimile transmission if
delivered during business hours or on the next successive business day if delivered by confirmed facsimile transmission after business hours.
Addresses for notice to either party shall be as shown on the signature page of this Agreement, or to such other address as may have been
furnished by either party in the manner set forth above.
22. Governing Law . This Agreement shall be governed exclusively by and construed according to the laws of the State of
Delaware as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware. This Agreement is
intended to be an agreement of the type contemplated by Section 145(f) of the General Corporation Law of Delaware. The Delaware Court of
Chancery shall have exclusive jurisdiction for resolution of disputes between Company and Indemnitee regarding this Agreement.
23. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to
be an original but all of which together shall constitute one and the same Agreement, and electronically transmitted signatures shall be valid.
The parties hereto have entered into this Indemnification Agreement, including the undertaking contained herein, effective as of the
date first above written.
11
INDEMNITEE:
THE COMPANY:
Name:_________________________________
By:
Its:
Address:
WEST\255368202.1
SIGNATURE PAGE TO INDEMNIFICATION AGREEMENT
List of Subsidiaries
Contributed to Lumentum Holdings Inc.
as of Separation (August 1, 2015)
Name of Entity
DOMESTIC
CCOP International Holdings Inc.
E20 Communications Inc.
JDSU Optical Corporation
Lightwave Electronics Corporation
Lumentum Inc.
Lumentum Operations LLC
Ramar Corporation
SDL Optics, Inc.
SDL PIRI, Inc.
INTERNATIONAL
CCOP International (Thailand) Co. Ltd.
JDS Uniphase (Israel) Limited
JDS Uniphase Asia Limited
JDS Uniphase Canada Ltd
JDS Uniphase Inc.
Lumentum K.K. fomerly JDS Uniphase KK
JDS Uniphase Nova Scotia Limited
JDSU Communication Technology (Shenzhen) Co. Ltd
JDSU Ultrafast Lasers AG
Lumentum Netherlands B.V.
Lumentum International Tech Co.
State or Other
Jurisdiction of
Incorporation or
Organization
Delaware
Delaware
Massachusetts
California
Delaware
Delaware
Massachusetts
Delaware
Delaware
Thailand
Israel
Hong Kong
Canada
Canada
Japan
Nova Scotia
China
Switzerland
Netherlands
Cayman Islands
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-205918) of Lumentum Holdings Inc. of our
report dated September 25, 2015 relating to the financial statements and financial statement schedule, which appears in this Form 10‑K.
/s/ PricewaterhouseCoopers LLP
San Jose, CA
September 25, 2015
2
Exhibit 31.1
LUMENTUM HOLDINGS INC.
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Alan Lowe, certify that:
1. I have reviewed this Annual Report on Form 10-K of Lumentum Holdings Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Dated: September 25, 2015
/s/ ALAN LOWE
Alan Lowe
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
LUMENTUM HOLDINGS INC.
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Aaron Tachibana, certify that:
1. I have reviewed this Annual Report on Form 10-K of Lumentum Holdings Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Dated: September 25, 2015
/s/ AARON TACHIBANA
Aaron Tachibana
Chief Financial Officer
(Principal Financial and Accounting Officer)
LUMENTUM HOLDINGS INC.
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Lumentum Holdings Inc. (the “Company”) for the year ended June 27, 2015 as filed with the
Securities and Exchange Commission (the “Report”), I, Alan Lowe, President and Chief Executive Officer (Principal Executive Officer) of the Company, hereby
certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the
dates and for the periods indicated.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
Dated: September 25, 2015
/s/ ALAN LOWE
Alan Lowe
President and Chief Executive Officer
(Principal Executive Officer)
LUMENTUM HOLDINGS INC.
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Lumentum Holdings Inc. (the “Company”) for the year ended June 27, 2015 as filed with the
Securities and Exchange Commission (the “Report”), I, Aaron Tachibana, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for
purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the
dates and for the periods indicated.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
Dated: September 25, 2015
/s/ AARON TACHIBANA
Aaron Tachibana
Chief Financial Officer
(Principal Financial and Accounting Officer)