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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 30, 2018
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 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, a smaller reporting company, or an
emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting
company)
o
Smaller reporting company
Emerging Growth company
o
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 30, 2017 , the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was
approximately $1,678 million based on the closing sales price of the registrant’s common stock as reported on the NASDAQ Stock Market on December 29,
2017 of $48.90 per share. Shares of common stock held by officers, directors and holders of more than five percent of the outstanding common stock have been
excluded from this calculation because such persons may be deemed to be affiliates.
As of August 23, 2018 , the Registrant had 63.3 million shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the information called for by Part III of this Annual Report on Form 10-K is hereby incorporated by reference from the definitive proxy statement
for the Registrant’s annual meeting of stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after the Registrant’s
fiscal year ended June 30, 2018 .
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 AND 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
ITEM 16.
FORM 10-K SUMMARY
SIGNATURES
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These statements are based on our current
expectations and involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from
those expressed or implied by such forward-looking statements. These statements relate to, among other things, our markets, products and strategy, sales, gross
margins, operating expenses, capital expenditures and requirements, liquidity, product development and R&D efforts, manufacturing plans, litigation, effective tax
rates and tax reserves, our corporate and financial reporting structure, our plans for growth and innovation, the successful integration of Oclaro’s business
(including personnel) after closing, and expected synergies and non-GAAP earnings accretion from the acquisition of Oclaro, and are often identified by the use of
words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,”
“should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs
and assumptions of our management, which are in turn based on information currently available to management. Such forward-looking statements are subject to
risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or
implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section
entitled “ Risk Factors ” included under Part I, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as
required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
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ITEM 1. BUSINESS
General
Overview
PART I
Lumentum Holdings Inc. (“we”, “our”, “Lumentum” or the “Company”) is an industry-leading provider of optical and photonic products defined by revenue
and market share addressing a range of end market applications including Optical Communications and Commercial Lasers for manufacturing, inspection and life-
science applications. We seek to use our core optical and photonic technology and our volume manufacturing capability to expand into attractive emerging markets
that benefit from advantages that optical or photonics-based solutions provide, including 3D sensing for consumer electronics and diode light sources for a variety
of consumer and industrial applications. The majority of our customers tend to be original equipment manufacturers (“OEMs”) that incorporate our products into
their products which then address end-market applications. For example, we sell fiber optic components that 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.
For 3D sensing, we sell diode lasers to manufacturers of consumer electronics products for mobile, personal computing, and gaming who then integrate our devices
within their products, for eventual resale to consumers and also into other industrial applications.
We operate in two reportable segments: Optical Communications (“OpComms”) and Commercial Lasers (“Lasers”).
We have a global marketing and sales footprint that enables us to address global market opportunities for our products. We have manufacturing capabilities
and facilities in North America, Asia-Pacific, and Europe, with employees engaged in R&D, administration, manufacturing, support and sales and marketing
activities. Our headquarters are located in Milpitas, California, and we employed approximately 2,930 full-time employees around the world as of June 30, 2018 .
Lumentum was incorporated in Delaware as a wholly owned subsidiary of JDS Uniphase Corporation (“JDSU”) on February 10, 2015, and is comprised of
the former communications and commercial optical products (“CCOP”) segment and WaveReady product lines of JDSU. In August 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 on July 27, 2015, received one share of Lumentum common stock for every five shares of JDSU common
stock held on such date. JDSU was renamed Viavi Solutions Inc. (“Viavi”) and at the time of distribution, retained ownership of 19.9% of Lumentum’s outstanding
shares. Since the Separation, Viavi has sold a significant portion of its shares and is no longer a significant shareholder of Lumentum.
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 broadened the depth and
breadth of the OpComms and Lasers businesses, as well as the intellectual property, technology and product offerings, of what is now Lumentum. Notable amongst
these acquisitions in the OpComms business were 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 lasers (“VCSELs”) for
enterprise, datacenter networking, and 3D sensing applications. The fundamental laser component technologies which we acquired through these acquisitions, form
the basis of virtually all optical networks today and we believe will continue to do so for the foreseeable future. These technologies will 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 Inc. (“Time-Bandwidth”) 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.
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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 rapid growth in both the number of higher bandwidth 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 3D sensing applications that employ our laser technology in mobile devices, computers, augmented
and virtual reality and other consumer electronics devices. Additionally, our products are used in emerging automotive, industrial, security, safety and surveillance
applications.
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. We do,
however, 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, the demand environment in China has fluctuated significantly in recent years, and has created volatility and uncertainty in our future
demand. 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) 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; and (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.
Reportable Segments
We are an industry leading provider of optical and photonic products defined by revenue and market share addressing a range of end-market applications
including optical communications and commercial lasers. We have two operating segments: OpComms and Lasers. The two operating segments were primarily
determined based on how the Chief Operating Decision Maker (“CODM”) views and evaluates our operations. Operating results are regularly reviewed by the
CODM to make decisions about resources to be allocated to the segments and to assess their performance. Other factors, including market separation and customer
specific applications, go-to-market channels, products and manufacturing, are considered in determining the formation of these operating segments. We do not
track all of our property, plant, and equipment by operating segments. For the geographic identification of these assets, refer to “ Note 19. Operating Segments and
Geographic Information ”.
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 product offerings within the OpComms segment:
Optical Communications:
Telecom
Datacom
Consumer and Industrial
Lasers
June 30, 2018
Years Ended
July 1, 2017
July 2, 2016
84.9%
38.1%
12.1%
34.7%
15.1%
85.6%
61.0%
20.1%
4.5%
14.4%
84.3%
61.5%
18.1%
4.7%
15.7%
For further information regarding our operating segments, please refer to “ Note 19. Operating Segments and Geographic Information ” in the Notes to
Consolidated Financial Statements.
OpComms
Markets
Our OpComms products address the following markets: telecommunications (“Telecom”), data communications (“Datacom”) and consumer and industrial
(“Consumer and Industrial”).
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Our OpComms products include a wide range of components, modules and subsystems to support and maintain customers including carrier networks for
access (local), metro (intracity), long-haul (city-to-city and worldwide) and submarine (undersea). Additionally, our products address enterprise, cloud, and data
center applications, including storage-access networks (“SANs”), local-area networks (“LANs”) and 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 these fast growing OpComms
markets through our extensive product portfolio, including reconfigurable optical add/drop multiplexers (“ROADMs”), tunable 10-gigabit small form-factor
pluggable transceivers and tunable small form-factor pluggable transceivers. Our 10G, 40G legacy transceivers and a growing portfolio of 100G pluggable
transceivers support LAN/SAN/WAN needs and the cloud for customers building enterprise and hyperscale data center networks. Additionally, we are engaging
customers in the sale of laser chips for use in the manufacture of high-speed transceivers.
In the Consumer and Industrial market, our OpComms products include laser light sources, which are integrated into 3D sensing platforms being used in
applications for mobile devices, gaming, computers, and other consumer electronics devices. New emerging applications include virtual and augmented reality, as
well as automotive and industrial segments. Our products include VCSELs and edge emitting lasers which are used in 3D sensing depth imaging systems. These
systems simplify the way people interact with technology by enabling the use of natural user interfaces. Systems are used for biometric identification, surveillance,
and process efficiency, among numerous other application spaces. Emerging applications for this technology include various mobile device applications,
autonomous vehicles, self-navigating robotics and drones in industrial applications and 3D capture of objects coupled with 3D printing. In addition, our industrial
diode lasers are used primarily as pump sources for pulsed and CW Fiber Lasers.
Customers
Our OpComms customers include Accelink, Alphabet (formerly Google), Apple, Arista, Arris, Ciena, Cisco Systems, Coriant, ECI, Facebook, FiberHome,
Fujitsu, HiSilicon, Huawei Marine, Huawei Technologies, Infinera, Microsoft, NEC, Nokia Networks (including Alcatel-Lucent International), O-Net, Oplink,
Padtec, TE Subcom, and Yahoo. During fiscal 2018 , 2017 , and 2016 , net revenue generated from a single customer which represented 10% or more of our total
net revenue of the applicable fiscal year is summarized in the table below:
APPLE
HUAWEI
CIENA
CISCO
*Represents less than 10% of total net revenue
Trends
June 30, 2018
Years Ended
July 1, 2017
July 2, 2016
30.0%
11.0%
11.0%
*
*
16.7%
18.5%
12.4%
*
17.1%
17.1%
13.0%
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.
The growing demand for capacity encourages the adoption of OpComms products across the Datacom and Telecom markets. Demand for capacity in the
Datacom market is driven by the growing needs of LANs and WANs. Growth in 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.
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
network operator 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 we expect it will 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.
Our optical products are well positioned to meet these demands. Our innovation has resulted in products that have more functionality, are less than half the
size, require less power and are more cost-effective than our historical products, particularly in the area of photonic integrated circuits. Higher levels of integration
have also led to development of our 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 endeavor to align the latest technologies with industry leading, scalable manufacturing and operations to drive the next phase of optical
communications technologies and products for Telecom and Datacom applications that are faster, more agile and more reliable, making us a valuable business and
technology partner for NEMs, consumer electronic companies, 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 II-VI, Acacia Communications, Accelink, ams AG, Applied Optoelectronic, Finisar, Foxconn Interconnect Technology, Furukawa Electric, Neophotonics,
Oclaro, and Sumitomo Electric Industries. Private companies and subsidiaries of public companies providing optical communications components include Fujitsu
Optical Components - a subsidiary of Fujitsu, Innolight Technology, Nistica - a subsidiary of Fujikura, and O-Net.
Offerings
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
(from 20 to 40Tb/s in the C-Band) links driven by increasing 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 make
components for transport, including 980nm, multi-mode and Raman pumps for optical amplifiers, and passive components. Passive components include switches,
attenuators, photodetectors, gain flattening filters, isolators, wavelength-division multiplexing (“WDM”) filters, arrayed waveguide gratings (“AWGs”),
multiplex/de-multiplexers and integrated passive modules.
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 Fiber 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 and 4k video.
Our integrated fiber optic transceivers provide cost effective and scalable connectivity and are used in the hardware that 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 the high 100G data rate, we offer several technologies to balance technical and commercial requirements. For high volume, short distance applications we
developed our VCSELs. VCSELs are ideal for short reaches because they are low power consumption, low cost and highly scalable. For high-performance, longer
distance applications we have our distributed feedback laser (“DFB”)
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and electro-absorption modulated laser (“EML”). Our individual lasers and compact laser arrays offer an innovative solution for the LANs, SANs, broadband
Internet and metro-area network as well as hyperscale datacenter applications.
Our 3D sensing technology enables 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, 3D scanning for space mapping and facial recognition for security. Emerging applications for this technology include various mobile
device applications, autonomous vehicles, self-navigating robotics and drones in industrial applications and 3D capture of objects coupled with 3D printing. 3D
sensing can be applied to any device with a camera. The technologies to achieve accurate and stable 3D sensing are converging to laser based solutions. We are a
leading supplier of the critical laser illumination sources for 3D sensing systems being used in applications for gaming, computing, mobile devices, and home
entertainment.
Lasers
Markets
Our Lasers products serve our customers in markets and applications such as sheet metal processing, general manufacturing, biotechnology, graphics and
imaging, remote sensing, and precision machining such as drilling in printed circuit boards, wafer singulation, glass cutting and solar cell scribing.
Our Lasers products are used in a variety of OEM applications including diode-pumped solid-state, fiber, diode, direct-diode and gas lasers such as argon-ion
and helium-neon lasers. Fiber lasers provide kW-class output powers combined with excellent beam quality and are used in sheet metal processing and metal
welding applications. Diode-pumped solid-state 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.
We also provide high-powered and ultrafast lasers for the industrial and scientific markets. Manufacturers use high-power, ultrafast lasers to create micro
parts for consumer electronics and to process semiconductor, LED, and other types of chips. Use of ultrafast lasers for micromachining applications is being driven
primarily by the increasing use of consumer electronics and connected devices globally.
Our portfolio of Lasers 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, ASML Holding, Beckman Coulter, Becton, Dickinson and Company, DISCO, Electro Scientific Industries, EO
Technics, Han’s Laser Technology, and KLA-Tencor. During fiscal 2018 , 2017 , and 2016 , we did not have any single customer attributable to our Lasers
segment that generated net revenue of 10% or more of our total net revenue for the applicable fiscal year.
Trends
As technology advances, industries such as consumer electronics manufacturing 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, these
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.
Sheet metal processing and metal welding applications are increasingly using kW-class fiber lasers instead of kW-class CO2 lasers. Fiber lasers generate
higher productivity at lower cost in such applications because they exhibit lower power consumption, better quality and generally lower user maintenance costs.
In addition, demand continues for electronic products, as well as products and components in other industries, with greater functionality while becoming
smaller, lighter and less expensive. Innovative / Next generation product designs require precise
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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 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.
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 Coherent and IPG Photonics.
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 evaluate strategic opportunities regularly and, where appropriate, may acquire additional businesses, products, or technologies 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 from acquisitions as well as through organic initiatives.
On March 11, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Oclaro, Inc. (“Oclaro”), Prota Merger Sub, Inc., and
Prota Merger, LLC, pursuant to which we will acquire Oclaro and Oclaro will become a wholly-owned subsidiary of Lumentum. In accordance with the terms of
the Merger Agreement, each issued and outstanding share of Oclaro common stock will be exchanged for $5.60 in cash and 0.0636 of a share of Lumentum
common stock, subject to the conditions and restrictions set forth in the Merger Agreement. The total transaction consideration was approximately $1.8 billion as
of the date of the Merger Agreement. Oclaro stockholders will own approximately 16% of the combined company following the closing. Oclaro’s stockholders
approved the Merger Agreement on July 10, 2018 and we have received approval for the transaction under the Hart-Scott Rodino Act in the United States. We are
in the process of obtaining antitrust approval in China. The Merger Agreement contains certain termination rights for both Lumentum and Oclaro. The Merger
Agreement further provides that upon termination of the Merger Agreement under specified circumstances relating to failure to obtain regulatory approvals,
Lumentum may be required to pay Oclaro a termination fee of $80 million.
As of August 23, 2018, the total transaction consideration was expected to be approximately $1.7 billion, which would be funded by a combination of $700
million in Lumentum common stock, $500 million in new debt, and the remaining amount from the cash balances of the combined company.
In February 2017, we completed the acquisition of a privately held company to enhance our manufacturing and vertical integration capabilities. We acquired
all of the outstanding shares of the company for a total purchase consideration of $8.7 million. In connection with the acquisition, we paid upfront cash
consideration of $5.1 million, incurred liabilities of $2.7 million contingent upon the achievement of certain production targets being achieved within 36 months
following the acquisition date, and retained $0.9 million of the purchase price as security for the seller’s indemnification obligations, which was fully paid to the
seller subsequent to the year ended June 30, 2018 .
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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 improving efficiencies and reducing costs by consolidating operations where
appropriate , 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 “ Note 14. Restructuring and Related Charges
” in the Notes to Consolidated Financial Statements for information on restructuring charges.
Research and Development
During fiscal 2018 , 2017 and 2016 , we incurred R&D expenses of $ 156.8 million , $148.3 million and $141.1 million, respectively. The number of
employees engaged in R&D was approximately 587 as of June 30, 2018 , 598 as of July 1, 2017 and 570 as of July 2, 2016 .
We devote substantial resources to R&D for the development of 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 maintaining our capability to provide products throughout the network, while focusing on several important sub-segments.
We are increasing our emphasis on Datacom products, such as 100G and 400G 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 3D sensing systems that simplify the way that people interact with technology. These solutions are initially being used in computing, mobile, and
industrial applications, including automotive applications.
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. These products 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, Thailand, and Switzerland. In March 2017, we completed the purchase of a property
in Thailand for additional manufacturing capacity for our future growth.
On March 30, 2018, we entered into a Transition Services Agreement (“TSA”) with one of our contract manufacturers to wind down the production of our
products at their facility in China and to facilitate an orderly transition of manufacturing to our manufacturing facility in Thailand, including the purchase of the
manufacturing equipment. Under the terms of the TSA, we are required to pay $5.3 million in cash upon completion of certain milestones related to the purchase of
equipment. We are also required to share cost of retention and severance, and to reimburse for certain other direct and indirect costs incurred by our contract
manufacturer for transition services provided. As of June 30, 2018, we have not acquired any assets under this TSA. Please refer to “ Note 6. Asset Acquisition ” in
the Notes to Consolidated Financial Statements.
Our significant contract manufacturing partners are located primarily in Thailand, Taiwan and China. Contract manufacturers can save a significant amount
of dollars on labor, material and other related production expenses. We rely on the capabilities of our contract manufactures to procure the components and manage
the inventory in these locations.
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.
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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. As of June 30, 2018 , we owned 636 U.S.
patents and 255 foreign patents with expiration dates ranging from July 2018 through June 2037, and had 193 patent applications pending throughout the world.
Seasonality
Our revenue may be influenced on a quarter to quarter basis by customer demand patterns and new product introductions. Some of our products may be
incorporated into consumer electronic products, which are subject to seasonality and fluctuations in demand.
Backlog
Backlog consists of purchase orders for products for which we have assigned shipment dates.
As of June 30, 2018 , our backlog was $ 370.6 million , as compared to $218.4 million as of July 1, 2017 . 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 30, 2018 , we employed approximately 2,930 full-time employees including approximately 1,900 employees in manufacturing, 587 employees in
R&D and 443 employees in SG&A.
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 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. We have not been presented with any claims to date.
International Operations
During fiscal 2018 , 2017 and 2016 , net revenue from customers outside the United States based on the geographic region and country where our product is
initially shipped, represented 90.8%, 85.2% and 82.0% of net revenue, respectively. In certain circumstances customers may request shipment of our products to a
contract manufacturer in one country, which may differ from the location of their end customers. During fiscal 2018 , our net revenue from Hong Kong, Mexico,
South Korea, and Japan represented 14.7%, 11.7%, 11.7%, and 15.6% of our consolidated net revenue, respectively. During fiscal 2017 , our net revenue from
Hong Kong, Mexico, and Japan represented 22.6%, 18.5% and 9.9% of our consolidated net revenue, respectively. During fiscal 2016 , our net revenue from Hong
Kong, Mexico and Japan represented 23.7%, 12.5% and 10.3% of our consolidated 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 30, 2018 and July 1, 2017 , long-lived assets, namely our net property, plant and equipment, located outside of the United States comprised 68.2%
and 67.8% of our total property, plant and equipment, net, respectively. As of June 30, 2018 ,
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22.8% and 35.0% of our net property, plant and equipment were located in China and Thailand, respectively. As of July 1, 2017 , 30.1% and 31.2% of our net
property, plant and equipment were located in China and Thailand, respectively.
Please refer to “ Note 19. Operating Segments and Geographic Information ” in the Notes to Consolidated Financial Statements. For information regarding
risks associated with our international operations, see “Item 1A. Risk Factors.”
Available Information
Our website is located at www.lumentum.com, and our investor relations website is located at www.investor.lumentum.com. Copies of our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act, as amended, are available free of charge on our investor relations website as soon as reasonably practicable after we file such material
electronically with or furnish it to the Securities and Exchange Commission (the “SEC”). The SEC also maintains a website that contains our SEC filings at
www.sec.gov.
Investors and others should note that we routinely use the Investors section of our website to announce material information to investors and the marketplace.
While not all of the information that the Company posts on its corporate website is of a material nature, some information could be deemed to be material.
Accordingly, the Company encourages investors, the media and others interested in the Company to review the information that it shares on www.lumentum.com.
Information in, or that can be accessed through, our website is not incorporated into this Form 10-K.
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ITEM 1A. RISK FACTORS
Investors in our securities should carefully consider all of the relevant factors disclosed by us, including the following factors that could affect our results of
operations, financial condition or stock price.
Risks Related to Our Business
Changing technology and intense competition require us to continuously 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 prices 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.
Historically, these pricing pressures have led to a continued decline of average selling prices across our business. The development of new, technologically
advanced products is a complex and uncertain process requiring high levels of innovation and the accurate prediction of technological and market trends. The
introduction of new products also requires significant investment to ramp up production capacity, for which benefit may not be realized if we are not successful in
the production of such products or if customer demand does not develop as expected. Ramping of production capacity also entails risks of delays which can limit
our ability to realize the full benefit of new product introductions. We cannot assure you that we will be able to identify, develop, manufacture, market or support
new or enhanced products successfully, if at all, or on a timely basis. We also cannot assure you that potential markets for our new products will materialize on the
timelines we anticipate, or at all, or that our technology will meet our customers’ specifications. Our future performance will depend on the successful
development, introduction, deployment and market acceptance of new and enhanced features and products that meet our customers’ current and future needs.
The market for optical communications products in particular has matured over time and these 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 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 established legacy products. 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 products, our financial
condition 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 public and private companies, many
of which may have substantially greater financial, technical, marketing and distribution resources and brand name recognition than we have. These competitors
include II-VI, Acacia Communications, Applied Optoelectronics, Coherent, Finisar, Foxconn Interconnect Technology, Fujitsu Optical Components, Furukawa
Electric, InnoLight Technology, IPG Photonics, Neophotonics, Source Photonics, and Sumitomo Electric Industries. We may not be able to compete successfully
against either current or future competitors. Our competitors may continue to enter markets or gain or retain market share through introduction of new or improved
products or with 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 and which may intensify competition in
the various markets. 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.
We rely on a limited number of customers for a significant portion of our sales; 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 in certain of our markets, such as 3D sensing, this
customer concentration is particularly acute. We expect that this customer concentration will continue in the future and we expect that our growth prospects will
continue to be concentrated in a small number of customers. Many of our customers purchase products under purchase orders or under contracts that do not contain
volume purchase commitments. Some customers provide us with their expected forecasts for our products several months in advance, but these customers may
decrease, cancel or delay purchase orders already in place, including on short notice, and the impact of any such actions may be intensified given our dependence
on a limited number of large customers. In addition, changes in the business requirements, vendor selection, project prioritization, financial prospects, capital
resources, and expenditures, or purchasing behavior (including product mix
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purchased or timing of purchases) of our key customers, or any real or perceived quality issues related to the products that we sell to such 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. Further, we may be required to purchase raw materials, increase production capacity or make other
changes to our business to accommodate certain large customers. If forecasted orders do not materialize, we may need to reduce investment in R&D activities, we
may fail to optimize our manufacturing capacity, we may incur liabilities with our suppliers for reimbursement of capital expenditures, or we may have excess
inventory. In addition, if we incur expenses in response to forecasted demand and do not have a corresponding increase in revenue, our profitability may suffer.
Any of these factors could adversely affect our business, financial condition and results of operations.
The manufacturing of our products may be adversely affected if our contract manufacturers and suppliers fail to meet our production requirements 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 products. We depend on these manufacturers to meet our production and capacity requirements and to provide quality products to
our customers. Despite rigorous testing for quality, both by us and the contract manufacturers to whom we sell products, we may receive and ship defective
products. We may incur significant costs to correct defective products which could result in the loss of future sales, indemnification costs or costs to replace or
repair the defective products, litigation and damage to our reputation and customer relations. Defective products may also cause diversion of management attention
from our business and product development efforts.
Additionally, the ability of our contract manufacturers to fulfill their obligations may be affected by natural disasters, changes in legal requirements, labor
strikes and other labor unrest and economic, political or other forces that are beyond our control. For example, we recently experienced a labor strike at one of our
contract manufacturers which threatened the contract manufacturer’s ability to fulfill its product commitments to us and, in turn, our ability to fulfill our
obligations to our customers. Further, certain of our contract manufacturers are located in China, which exposes us to risks associated with Chinese laws and
regulations, such as those related to import and export policies, tariffs, taxation and intellectual property. Chinese laws and regulations are subject to frequent
change, and if our contract manufacturers are unable to obtain or retain the requisite legal permits or otherwise to comply with Chinese legal requirements, we may
be forced to obtain products from other manufacturers or to make other operational changes, including transferring our manufacturing to another manufacturer or
to our Thailand manufacturing facility. Any such developments could have a material impact on our ability to meet our customers’ expectations and may materially
impact our operating results. In 2018, the United States imposed tariffs on the import of certain products manufactured in China, and has proposed further tariffs,
which could increase costs associated with the manufacture of our products in China and negatively impact our sales levels and profit margins.
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. Alternatively, our contract manufacturers may not be
able to meet our demand which would inhibit our ability to meet customer demand and maintain or grow our revenues. Furthermore, it could be costly and require
a long period of time to move products from one contract manufacturer to another which could result in interruptions in supply and adversely 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 Thailand 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 different facility or contract manufacturer which could
then result in interruptions in supply, and would likely materially impact our financial condition and results of operations.
In addition, for a variety of reasons, including changes in circumstances at our contract manufacturers or our own business strategies, we may be required to,
or voluntarily may, transfer the manufacturing of certain products to other manufacturing sites, including our new Thailand manufacturing facility. For example,
we are in the process of transitioning the manufacturing of our products with one of our contract manufacturers in China to our Thailand manufacturing facility. As
a result of such transfers, our contract manufacturers may prioritize other customers or otherwise be unable to meet our demand. If such transfers are unsuccessful,
it could result in interruptions in supply and would likely 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.
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In addition, many of our products are sourced from suppliers based outside of the United States, primarily in Asia. Uncertainty with respect to tax and trade
policies, tariffs and government regulations affecting trade between the United States and other countries has recently increased. Major developments in tax policy
or trade relations, such as the imposition of tariffs on imported products, could increase our product and product-related costs or require us to seek alternative
suppliers, either of which could result in decreased sales or increases product and product-related costs.
If our customers do not qualify our manufacturing lines or the manufacturing lines of our subcontractors for volume shipments, our operating results
could suffer.
Certain of our customers do not purchase products, other than limited numbers of evaluation units, prior to qualification of the manufacturing line for volume
production. Our existing manufacturing lines, as well as each new manufacturing line, must pass through varying levels of qualification with certain of our
customers. Our manufacturing lines have passed our qualification standards, as well as our technical standards. However, some of our customers also require that
our manufacturing lines pass their specific qualification standards and that we, and any subcontractors that we may use, be registered under international quality
standards. We may encounter quality control issues as a result of relocating our manufacturing lines or introducing new products to fill production. We may be
unable to obtain customer qualification of our manufacturing lines or we may experience delays in obtaining customer qualification of our manufacturing lines. If
we introduce new contract manufacturing partners and move any production lines from existing internal or external facilities, the new production lines will likely
need to be re-qualified with our customers. Any delays or failure to obtain qualifications would harm our operating results and customer relationships.
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 purchase raw materials, packages and components from a limited number of suppliers, who are often small and specialized. Additionally, some of our
suppliers are our sole sources for certain materials, equipment and components. We depend on the timely and continued supply and quality of the materials,
packages and components that our suppliers supply to us. In general, we have not entered into long-term agreements with our suppliers. As a result, these suppliers
generally may stop supplying us materials and equipment at any time. 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 sole suppliers or limited number of suppliers include receipt of defective parts
or contaminated materials, stoppages or delays of supply, insufficient resources to supply our requirements, substitution of more expensive or less reliable
materials, increases in the price of supplies, and an inability to obtain reduced pricing from our suppliers in response to competitive pressures. Any disruption in
the supply of the raw materials, packaging or components used in the manufacture and delivery of our products could have a material adverse impact on our
business, financial condition and results of operations.
We contract with a number of large OEM and end-user service providers and product companies 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.
Large OEM and end-user service providers and product companies 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, including us. 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, large customers have increased buying power and ability to require onerous terms in our contracts with them, including pricing, warranties, and
indemnification terms. If we are unable to satisfy the terms of these contracts, it could result in liabilities of a material nature, including litigation, damages,
additional costs, loss of market share and loss of reputation. 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 could 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 in particular 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.
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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 revenue 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 through third-party contract manufacturers, as well as through our own international
facilities, with employees engaged in R&D, administration, manufacturing, support and sales and marketing activities.
As a result of our international operations, in addition to similar risks we face in our U.S. operations, we are affected by economic, business, regulatory,
social, and political conditions in foreign countries, including the following:
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•
•
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•
•
•
•
changes in general IT spending;
the imposition of government controls, inclusive of critical infrastructure protection;
changes in or limitations imposed by trade protection laws or other regulatory orders or requirements in the United States or in other countries,
including tariffs, sanctions, or other costs or requirements which may affect our ability to import or export our products from various countries;
varying and potentially conflicting laws and regulations;
fluctuations in local economies;
wage inflation or a tightening of the labor market;
political developments of foreign nations; and
the impact of the following on service provider and government spending patterns as well as our contract and internal manufacturing: political
considerations, unfavorable changes in tax treaties or laws, unfavorable events that affect foreign currencies, 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.
Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreign
leaders regarding the possibility of instituting tariffs against foreign imports of certain materials. More specifically, the United States and China have applied tariffs
to certain of each other’s exports. The institution of trade tariffs both globally and between the United States and China specifically carries the risk of negatively
impacting overall economic conditions, which could have negative repercussions on the Company. Furthermore, imposition of tariffs could cause a decrease in the
sales of our products to customers located in China or other customers selling to Chinese end users, which would directly impact our business.
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 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 relationships with customers and
suppliers, 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.
We face a number of risks related to our strategic transactions.
We have made acquisitions of other businesses or technologies in the past and we will continue to review and may pursue acquisition and other strategic
opportunities, for example, our proposed acquisition of Oclaro announced in March 2018. Such strategic transactions involve numerous risks, including the
following:
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•
diversion of management’s attention from normal daily operations of the business;
unforeseen expenses, delays or conditions imposed upon the acquisition or transaction, including due to required regulatory approvals or
consents;
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unanticipated changes in the combined business due to potential divestitures or other requirements imposed by antitrust regulators;
unanticipated changes in the acquired business, including due to regulatory action or changes in the operating results or financial condition of the
business;
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;
loss of customers, suppliers or partners;
potential difficulties in completing projects associated with in-process R&D;
an acquisition or strategic transaction may not further our business strategy as we expected or we may overpay for, or otherwise not realize the
expected return on, our investments;
we may face unanticipated liabilities or our exposure for known contingencies and liabilities may exceed our estimates;
insufficient net revenue to offset increased expenses associated with acquisitions;
potential loss of key employees of the acquired companies or difficulty maintaining our company culture;
difficulty forecasting revenues and margins;
dilution of our current stockholders as a result of any issuance of equity securities as acquisition consideration;
expenditure of cash that would otherwise be available to operate our business;
incurrence of indebtedness on terms that are unfavorable to us, limit our operational flexibility or that we are unable to repay;
incurrence or assumption of contingent liabilities, known or unknown, including potential lawsuits, infringement actions or similar liabilities;
and
incurrence of impairment charges related to goodwill or other intangibles.
If we are unable to successfully manage any of these risks in relation to any future acquisitions, including our acquisition of Oclaro, our business, financial
condition and results of operations could be adversely impacted.
Changes in demand and customer requirements for our products may reduce manufacturing yields, which could negatively impact our profitability.
Manufacturing yields depend on a number of factors, including the volume of production due to customer demand and the nature and extent of changes in
specifications required by customers for which we perform design-in work. Changes in manufacturing processes required as a result of changes in product
specifications, changing customer needs, introduction of new product lines and changes in contract manufacturers may reduce manufacturing yields, resulting in
low or negative margins on those products. Moreover, an increase in the rejection rate of products during the quality control process, before, during or after
manufacture, results in lower gross margins from lower yields and additional rework costs. Any reduction in our manufacturing yields will adversely affect our
gross margins and could have a material impact on our operating results.
We incorporated changes to our international corporate structure in the fiscal third quarter of 2018 in order to further reduce our effective tax rate. We
have not operationalized the new international structure to the full extent possible at this time due to various factors including the pending acquisition of
Oclaro, which could significantly impact our existing tax strategy. If we are unable to fully adopt a new international structure or if it is successfully
challenged by the U.S. or foreign tax authorities, we may be unable to realize the anticipated tax savings which could materially and adversely affect our
operating results.
We initiated a new international corporate structure more closely aligned with our international operations during the fiscal third quarter of 2018. The new
corporate structure is intended to 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 new structure includes legal entities located in jurisdictions with income
tax rates lower than the U.S. statutory tax rate. The intercompany arrangements are intended to result in income earned by such entities in accordance with arm’s-
length
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principles and commensurate with functions performed, risks assumed and ownership of valuable corporate assets. We have not operationalized the new structure
to the full extent possible at this time due to various factors including the pending acquisition of Oclaro, which could significantly impact our existing tax strategy.
We are currently in the process of evaluating the Oclaro transaction’s impact to our tax structure and, depending on the outcome, we may make modifications to
the new structure in order to achieve better tax and operational efficiency.
We have agreed to reimburse Viavi for certain tax liabilities and related costs that may be incurred by Viavi, under certain circumstances, as a result of
implementing the new corporate structure or a modified structure in the future. 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 the anticipated benefit or it may take us several years to fully realize the
anticipated benefit.
If the new structure is not accepted by the applicable taxing authorities, if changes in domestic and international tax laws negatively impact the structure, if
the acquisition of Oclaro prevents us from implementing a tax efficient structure, or if we do not operate our business consistent with the new structure and
applicable tax provisions, we may fail to achieve the financial and operational efficiencies that we anticipate as a result of the new structure, and our business,
financial condition and operating results may be materially and adversely affected.
Changes in tax laws or ceasing to qualify for tax holiday in Thailand could have a material adverse effect on our business, cash flow, results of
operations or financial conditions.
As a multinational corporation, we are subject to income taxes as well as non-income based taxes, in both the U.S. and various foreign jurisdictions.
Significant uncertainties exist with respect to the amount of our tax liabilities, including those arising from potential changes in laws in the countries in which we
do business and the possibility of adverse determinations with respect to the application of existing laws. Many judgments are required in determining our
worldwide provision for income taxes and other tax liabilities, and we are under audit by various tax authorities, which often do not agree with positions taken by
us on our tax returns. Any unfavorable resolution of these uncertainties may have a significant adverse impact on our tax rate.
Increasingly, countries around the world are actively considering or have enacted changes in relevant tax, accounting and other laws, regulations and
interpretations. In particular, the Tax Cuts and Jobs Act (the “Tax Act”) contains many significant changes to the U.S. tax laws that affected our fiscal year ended
June 30, 2018, and which will continue to affect our fiscal years thereafter. The changes include, but are not limited to, (1) a reduction in the U.S. federal corporate
tax rate (resulting in a blended corporate rate of 28% for our fiscal year ended June 30, 2018, and a rate of 21% for our fiscal years thereafter); (2) a mandatory
deemed repatriation tax (“Transition Tax”) on certain deferred income of foreign subsidiaries that, if the taxpayer so elects, is payable over eight years; (3) bonus
depreciation that allows full expensing of qualified property; (4) elimination of the corporate alternative minimum tax; (5) addition of the Base Erosion and Anti-
Abuse Tax (“BEAT”), a new minimum tax on taxable income adjusted for certain base erosion payments; (6) a general elimination of U.S. federal income taxes on
dividends from foreign subsidiaries; (7) a new provision to currently tax Global Intangible Low-Taxed Income (“GILTI”); (8) a new limitation on deductible
interest expense; (9) the repeal of the domestic production activity deduction; (10) limitations on the deductibility of certain executive compensation; (11)
limitations on the use of foreign tax credits (“FTCs”) to reduce U.S. income tax liability; and (12) limitations on net operating losses generated in the taxable years
beginning after December 31, 2017, to 80 percent of taxable income.
The reduction in the U.S. federal statutory rate is expected to positively impact our federal cash tax liability. However, the ultimate impact is subject to the
effect of other complex provisions in the Tax Act (including the BEAT and GILTI), which we are currently reviewing, and it is possible that any impact of BEAT,
GILTI, or other provisions of the Tax Act could significantly reduce, or outweigh, the benefit of the reduction in the U.S. federal statutory rate. Due to the
uncertain practical and technical application of many of these provisions, we made reasonable estimates of the effects and recorded provisional amounts where
possible for the fiscal year ending June 30, 2018. The U.S. Treasury Department and the Internal Revenue Service (IRS), and other standards-setting bodies may
issue guidance on how the provisions of the Tax Act will be applied that is different from our interpretation. The Tax Act requires complex computations not
previously required or produced, and significant judgments and assumptions in the interpretation of the law were made in producing our provisional estimates. As
we complete our analyses, and interpret any additional guidance, we may adjust the provisional amounts we have recorded, and those adjustments may materially
impact our provision for income taxes in the period in which the adjustments are made. We also anticipate that uncertainty in the application of the Tax Act to our
ongoing operations as well as possible adverse future law changes attributable to changes in the U.S. political environment could have an adverse impact on our
future tax rate. Other countries also continue to consider enacting new laws, which could adversely affect us. The foregoing items could increase our future tax
expense, could change our future intentions regarding reinvestment of foreign earnings, and could have a material adverse effect on our business, financial
condition and results of operations.
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The income and non-income tax regimes we are subject to or operate under are unsettled and may be subject to significant change. Changes in tax laws or tax
rulings, or changes in interpretations of existing laws, could materially affect our financial position and results of operations. Many countries in Europe, as well as
a number of other countries and organizations, have recently proposed or recommended changes to existing tax laws or have enacted new laws that could increase
our tax obligations where we do business or require us to change the manner in which we operate our business. The Organization for Economic Cooperation and
Development has been working on a Base Erosion and Profit Sharing Project, and issued in 2015, and is expected to continue to issue, guidelines and proposals
that may change various aspects of the existing framework under which our tax obligations are determined in many of the countries in which we do business.
During fiscal 2018, our subsidiary in Thailand operated under a tax holiday. The tax holiday will expire in fiscal 2025 unless extension is granted by the
Thailand government and we continue to meet the requirements thereunder. If we do not meet the tax holiday requirements, if we are not granted extension by the
Thailand government, or if we decide not to apply for extension of the tax holiday, income earned in Thailand will be subject to higher statutory income tax rate,
which may cause our effective tax rate to increase and reduce our liquidity and cash flow.
Our operating results may be subject to volatility due to fluctuations in foreign currency.
We are exposed to foreign exchange risks with regard to our international operations which may affect our operating results. Since we conduct business in
currencies other than U.S. dollars but report our financial results in U.S. dollars, we face exposure to fluctuations in currency exchange rates. Although we price
our products primarily in U.S. dollars, a portion of our operating expenses are incurred in foreign currencies. For example, a portion of our expenses are
denominated in U.K. pound sterling and Japanese yen. Fluctuations in the exchange rate between these currencies and, to a lesser extent, other currencies in which
we collect revenues and/or pay expenses could have a material effect on our future operating results. 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.
Although we intend to hedge for a portion of our foreign currency exposure, significant fluctuations in exchange rates between the U.S. dollar and foreign
currencies may adversely affect our net income. Additionally, hedging programs rely on our ability to forecast accurately and could expose us to additional risks
that could adversely affect our financial condition and results of operations.
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, enterprise and
commercial laser 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 and the complexity and time involved in replacing or training new employees, could delay the development and introduction of new products, and
negatively impact our ability to market, sell, or support our products.
We may be unable to successfully implement our acquisitions strategy or integrate acquired companies and personnel with existing operations.
We have in the past acquired several companies, and have announced that we signed a definitive agreement to acquire Oclaro. We may continue to expand
and diversify our operations with additional acquisitions. We may be unable to identify or complete prospective acquisitions for many reasons, including
increasing competition from other potential acquirers, the effects of consolidation in our industries and potentially high valuations of acquisition candidates. In
addition, applicable antitrust laws and other regulations may limit our ability to acquire targets or force us to divest an acquired business. If we are unable to
identify suitable targets or complete acquisitions, our growth prospects may suffer, and we may not be able to realize sufficient scale and technological advantages
to compete effectively in all markets.
To the extent we are successful in making acquisitions, we may be unsuccessful in integrating acquired companies or product lines with existing operations,
or the integration may be more difficult or more costly than anticipated. Some of the risks that may affect our ability to integrate or realize any anticipated benefits
from acquired companies, businesses or assets include those associated with:
•
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unexpected losses of key employees of the acquired company;
conforming the acquired company’s standards, processes, procedures and controls with our operations, including integrating Enterprise Resource
Planning (“ERP”) systems and other key business applications;
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coordinating new product and process development;
increasing complexity from combining operations;
increasing the scope, geographic diversity and complexity of our operations;
difficulties in consolidating facilities and transferring processes and know-how; and
diversion of management’s attention from other business concerns.
In connection with acquisitions, we may:
•
•
•
•
•
•
use a signification portion of our available cash;
issue equity securities, which would dilute current stockholders’ percentage ownership;
incur significant debt;
incur or assume contingent liabilities, known or unknown, including potential lawsuits, infringement actions or similar liabilities;
incur impairment charges related to goodwill or other intangibles; and
face antitrust or other regulatory inquiries or actions.
In addition, the market price of our common stock could be adversely affected if the effect of any acquisitions on our consolidated financial results is dilutive
or is below the market's or financial analysts' expectations, or if there are unanticipated changes in the business or financial performance of the target company or
the combined company. Any failure to successfully integrate acquired businesses may disrupt our business and adversely impact our business, financial condition
and results of operations.
We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including to
support product development and introduce new products, address new markets, engage in strategic transactions and partnerships, improve or expand our operating
infrastructure or acquire complementary businesses and technologies. In March 2018, we entered into a commitment letter (the “Commitment Letter”) with
Deutsche Bank Securities Inc. and Deutsche Bank AG New York, New York Branch (the “Commitment Party”), pursuant to which, subject to the terms and
conditions set forth therein, the Commitment Party has committed to provide a senior secured term loan facility in an aggregate principal amount of up to $550
million. In March 2017, we issued and sold a total of $450 million in aggregate principal amount of Convertible Senior Notes due in 2024 (the “2024 Notes”) and
we may in the future engage in additional equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity,
equity-linked or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights,
preferences and privileges superior to those of holders of our common stock. Any debt financing we secure in the future could involve restrictive covenants
relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to
pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are
unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to
respond to business challenges could be significantly impaired, and our business may be harmed.
Our ability to hire and retain employees may be negatively impacted by changes in immigration laws, regulations and procedures.
Foreign nationals who are not U.S. citizens or permanent residents constitute an important part of our U.S. workforce, particularly in the areas of engineering
and product development. Our ability to hire and retain these workers and their ability to remain and work in the United States are impacted by laws and
regulations, as well as by procedures and enforcement practices of various government agencies. Changes in immigration laws, regulations or procedures,
including those that may be enacted by the current U.S. presidential administration, may adversely affect our ability to hire or retain such workers, increase our
operating expenses and negatively impact our ability to deliver our products and services.
Any failure, disruption or security breach of our information technology infrastructure or information management systems could have an adverse
impact on our business and operations.
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Our business depends significantly on effective and efficient information management systems, and the reliability and security of our information technology
infrastructure are essential to the health and expansion of our business. For example, the information gathered and processed by our information management
systems assists us in managing our supply chain, monitoring customer accounts, and protecting our proprietary and confidential business information, plans, trade
secrets, and intellectual property, among other things. In addition, these systems may also contain personal data or other protected information about our
employees, our customers’ employees, or others. We must continue to expand and update this infrastructure in response to our changing requirements as well as
evolving security standards and risks.
In some cases, we may rely upon third-party providers of hosting, support and other services to meet our information technology requirements. Any failure to
manage, expand and update our information technology infrastructure, including our ERP system and other applications, any failure in the extension
implementation or operation of this infrastructure, or any failure by our hosting and support partners or other third-party service providers in the performance of
their services could materially harm our business. In addition, we have partnered with third parties to support our information technology systems and to help
design, build, test, implement and maintain our information management systems. Our merger, acquisition and divestiture activity may also require transitions to or
from, and the integration of, various information management systems within our overall enterprise architecture, including our ERP system and other applications.
Those systems that we acquire may also pose security risks of which we are unaware or unable to mitigate, particularly during the transition of these systems.
Like other companies, we are subject to ongoing attempts by malicious actors, including through hacking, malware, ransomware, denial-of-service attacks,
social engineering, exploitation of internet-connected devices, and other attacks, to obtain unauthorized access or acquisition of confidential information or
otherwise affect service reliability and threaten the confidentiality, integrity and availability of information on our systems. We have been in the past, and may be
in the future, subject to social engineering and other cybersecurity attacks. Further, our third party service providers may have been and may be in the future
subject to such attacks. In addition, actions by our employees, service providers, partners, contractors or others, whether malicious or in error, could affect the
security of our systems. Additionally, while our security systems are designed to maintain the physical security of our facilities and information systems, accidental
or willful security breaches or other unauthorized access by third parties to our facilities or our information systems could lead to misappropriation of proprietary
and confidential information.
Despite our implementation of security measures, our systems and those of our third-party service providers are vulnerable to damage from these types of
attacks or errors. In addition, our systems may be impacted by natural disasters, terrorism or other similar disruptions. Any system failure, accident or security
breach affecting us or our third-party providers could result in disruptions to our operations and loss of or unauthorized access or damage to our data or in
inappropriate disclosure of confidential information. Any actual or alleged disruption to, or security breach affecting, our systems or those of our third-party
partners could cause significant damage to our reputation, lead to theft of our protected intellectual property and trade secrets, result in legal obligations or liability,
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.
Our revenues, operating results, and cash flows may fluctuate from period to period due to a number of factors, which makes predicting financial results
difficult.
Spending on optical communication and laser products is subject to cyclical and uneven fluctuations, which could cause our financial results to fluctuate
unevenly and unpredictably. It can be difficult to predict the degree to which end-customer demand and the seasonality and uneven sales patterns of our OEM
partners or other customers will affect our business in the future, particularly as we or they release new or enhanced products. While our fourth fiscal quarters are
typically strongest, future buying patterns may differ from historical seasonality. Further, if the mix of revenue changes, it may also cause results to differ from
historical seasonality. Accordingly, our quarterly and annual revenues, operating results, cash flows, and other financial and operating metrics may vary
significantly in the future, and the results of any prior periods should not be relied upon as an indication of future performance.
Our operating results may be adversely affected by unfavorable economic and market conditions.
Adverse changes to and uncertainty in the global economy may lead to decreased demand for our products and 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. Declines or
uncertainty in particular geographic regions, such as China or Europe, may impact IT-related spending generally and consequently, lead to lower growth or a
decline in our markets. The loss or delay of orders from any of our more significant customers could cause our revenue and profitability to suffer. The impact of
economic challenges on 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 deteriorate or remain uncertain, our
financial condition and results of operations would likely be materially and adversely impacted.
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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, or such patents
could be invalidated or ruled unenforceable. 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 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 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 house trademark for our company, and are in the process of establishing rights in this brand. The
Lumentum brand is 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 Lumentum brand, may not be sufficient or effective. Although we will seek to obtain trademark
registrations for the Lumentum brand, it is possible we may not be able to protect our brand 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 that, despite efforts, the scope of the protection obtained for our trademarks, including the Lumentum
brand, will be insufficient or that a registration may be deemed invalid or unenforceable in one or more jurisdictions throughout the world.
Further, a breach of our information technology infrastructure could result in the misappropriation of intellectual property, business plans or trade secrets.
Any failure of our systems or those of our third-party service providers could result in unauthorized access or acquisition of such proprietary information, and any
actual or perceived security breach could cause significant damage to our reputation and adversely impact our relationships with our customers.
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 regularly in our industry. We have in the past
received, 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 of such claims 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 or not 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.
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We also face risks that third parties may assert trademark infringement claims against us in one or more jurisdictions throughout the world related to our
Lumentum and Oclaro brands 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 or not 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 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 generally 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 “Part I, Item 3. Legal Proceedings.”
Lawsuits have been filed against us, Oclaro, its directors, and certain other parties challenging the Merger, and an adverse judgment in such lawsuits, or
any similar lawsuit, may prevent the Merger from being consummated or from being consummated within the expected timeframe.
As described in greater detail in “Part I, Item 3. Legal Proceedings” in this Annual Report on Form 10-K, we, along with Oclaro, Oclaro’s directors, and
certain other parties were named as defendants in two putative class action lawsuits. One of the lawsuits was filed in the United States District Court for the
Northern District of California and the other was filed in the United States District Court for the District of Delaware. Both have been voluntarily dismissed with
prejudice.
Oclaro and its directors were also named as defendants in five additional lawsuits, including two putative class actions, each of which was filed in the United
States District Court for the Northern District of California. Four of these five additional lawsuits have been dismissed. Three of the dismissals were with prejudice
and one was without prejudice. We were not named as a defendant in these five lawsuits.
Each of the above-referenced lawsuits was filed by purported stockholders of Oclaro to challenge the Merger. The plaintiffs have sought, among other things,
injunctive relief preventing the parties from consummating the Merger, rescission of the transactions contemplated by the Merger Agreement should they be
consummated, and litigation costs, including attorneys’ fees, as well as damages to be awarded to the plaintiff and any class if the Merger is consummated. One of
the conditions to consummating the Merger is the absence of any order, judgment or injunction enjoining or otherwise prohibiting consummation of the Merger in
any jurisdiction that is material to the business or operations of us or Oclaro. Consequently, if the remaining plaintiff - or any plaintiff who subsequently files a
similar lawsuit - is successful in obtaining an injunction preventing the parties from consummating the Merger, such injunction may prevent the Merger from being
completed in the expected timeframe, or at all. This lawsuit and any other subsequently filed similar lawsuits could also have a material adverse effect on our
business, results of operations and financial condition.
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 potentially require us 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.
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We are subject to laws and other regulations worldwide including with respect to environmental matters, securities laws, privacy and data protection,
compliance with which could increase our expenses and harm our operating results.
Our 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 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. These regulations 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 continuously monitor these laws and the regulations being adopted under them to determine
our responsibilities.
In addition, pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has promulgated rules requiring
disclosure regarding the use of certain “conflict minerals” that are mined from the Democratic Republic of Congo and adjoining countries and procedures
regarding a manufacturer’s efforts to prevent the sourcing of such minerals. Complying with these 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 operations 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.
Additionally, we are subject to laws and regulations with respect to personal data we collect from our employees, customers, and others. These laws and
regulations are subject to frequent modifications and updates and require ongoing supervision. For example, the European Union adopted a General Data
Protection Regulation (“GDPR”) that became effective in May 2018, and has established new, and in some cases more stringent, requirements for data protection
in Europe, and which provides for substantial penalties for noncompliance. We have made certain modifications to our practices in order to comply with these or
other requirements, and may be required to make additional modifications in order to comply with these or other requirements relating to privacy and data
protection in the future, each of which may require us to incur significant costs and expenses. Additionally, California enacted legislation in June 2018, the
California Consumer Privacy Act (“CCPA”), which will, among other things, require covered companies to provide new disclosures to California consumers when
it goes into effect on January 1, 2020. Legislators have stated that they intend to propose amendments to the CCPA before it goes into effect, and it remains unclear
what, if any, modifications will be made to this legislation or how it will be interpreted. The effects of the CCPA are potentially significant, however, and may
require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. Laws and regulations relating to
privacy and data protection continue to evolve in various jurisdictions, with existing laws and regulations subject to new and differing interpretations and new laws
and regulations being proposed and adopted. It is possible that our practices may be deemed not to comply with those privacy and data protection legal
requirements that apply to us now or in the future.
Further, in June 2016, a referendum was passed in the United Kingdom to leave the European Union, commonly referred to as “Brexit.” This created an
uncertain political and economic environment in the United Kingdom and other European Union countries, even though the formal process for leaving the
European Union may take years to complete and may not ultimately be effectuated. For example, while the United Kingdom has enacted a Data Protection Bill that
substantially implements GDPR, which became law in May 2018, there remains uncertainty with regard to whether the European Union will view this regulation
as adequate under GDPR and how data transfers between the United Kingdom and the European Union will be regulated.
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Our failure or perceived failure to comply with any of the foregoing legal and regulatory requirements could result in increased costs for our products,
monetary penalties, damages to our reputation, government inquiries and investigations, and legal action. Furthermore, the legal and regulatory requirements that
are applicable to our business are subject to change from time to time, which increases our monitoring and compliance costs and the risk that we may fall out of
compliance. Additionally, we may be required to ensure that our suppliers comply with applicable laws and regulations. If we or our suppliers fail to comply with
such laws or regulations, 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.
Our sales may decline if we are unable to obtain government authorization to export certain of our products, and we may 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 U.S. 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 (“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 (“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 and technical data,
are developed with government funding, and are currently subject to ITAR. Products and the associated technical data 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.
Further, there is increased attention from the government, the media and regarding potential threats to U.S. national security and foreign policy relating to
certain foreign entities, particularly Chinese entities, and the imposition of enhanced restrictions or sanctions regarding the export of our products or on specific
foreign entities that would restrict their ability to do business with U.S. companies may materially adversely affect our business. For example, in April 2018,
Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Communications Ltd. (collectively “ZTE”) were added to the U.S. Departments of
Commerce’s Bureau of Industry and Security’s List of Denied Persons, which imposed a seven year denial of export privileges against ZTE. However, in July
2018, the denial of export privileges was suspended and ZTE was removed from the List of Denied Persons. We are aware that certain of our customers have been
investigated by the U.S. government in the past and may be in the future.
Our association with customers that are or become subject to U.S. regulatory scrutiny or export restrictions could negatively impact our business.
Governmental actions such as these could subject us to actual or perceived reputational harm among current or prospective investors, suppliers or customers,
customers of our customers, other parties doing business with us, or the general public. Any such reputational harm could result in the loss of investors, suppliers
or customers, which could harm our business, financial condition, operating results or prospects.
In addition, certain of our significant customers and suppliers have products that are subject to U.S. export controls, and therefore these customers and
suppliers may also be subject to legal and regulatory consequences if they do not comply with applicable export control laws and regulations. Such regulatory
consequences could disrupt our ability to obtain components from our suppliers, or to sell our products to major customers, which could significantly increase our
costs, reduce our revenue and materially adversely affect our business, financial condition and results of operations.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate
financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-
Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and Nasdaq listing requirements. The Sarbanes-Oxley Act requires, among other things, that we
maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and improve the effectiveness of our
disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant
resources, including accounting-related costs and significant management oversight.
Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could cause us to delay
reporting of our financial results, be subject to one or more investigations or enforcement actions by state
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or federal regulatory agencies, stockholder lawsuits or other adverse actions requiring us to incur defense costs, pay fines, settlements or judgments. Any such
failures could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price
of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ stock market.
We face a number of risks related to our Separation from Viavi, including those associated with ongoing indemnification obligations and tax and
accounting-related risks, which could adversely affect our business, financial condition, results of operations and cash flows.
In August 2015, we 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”). The Separation and Distribution Agreement dated as of July 31, 2015 by and among JDSU,
Lumentum Holdings Inc. and Lumentum Operations LLC (the “Separation Agreement”) requires that we indemnify Viavi, and that Viavi indemnify us, for certain
specified liabilities related to the Separation. Among other things, we are obligated to indemnify Viavi against certain tax-related liabilities that may result from the
breach of any of our representations or covenants made in connection with the Separation. Our indemnification obligations are not subject to maximum loss clauses
and, if we are required to indemnify Viavi under the circumstances set forth in the Separation Agreement, we may be subject to substantial liabilities. Furthermore,
third parties could seek to hold us responsible for any of the liabilities that Viavi has agreed to indemnify us for, 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.
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 NASDAQ under the symbol “LITE”. Since shares of our common stock commenced trading on the NASDAQ stock market in
August 2015, the reported high and low closing prices of our common stock per the NASDAQ Global Select Market has ranged from $14.12 to $73.20, through
June 30, 2018. 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:
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actual or anticipated fluctuations in our quarterly or annual 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;
the financial performance of other companies in our industry;
success or failure of our business strategy;
credit market fluctuations which could negatively impact our ability to obtain financing as needed;
changes to the regulatory and legal environment in which we operate;
announcements by us, competitors, customers, or our contract manufacturers of significant acquisitions or dispositions, including our recently
announced merger with Oclaro;
investor perception of us and our industry;
changes in accounting standards, policies, guidance, interpretations or principles;
litigation or disputes in which we may become involved;
overall market fluctuations; sales of our shares by our officers, directors, or significant stockholders;
the timing and amount of dividends and share repurchases, if any; and
general economic and market conditions and other external factors.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity
securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating
performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to
become involved in securities
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litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of
operations, financial condition and cash flows.
Our proposed acquisition of Oclaro may not be completed, which could negatively affect our share price and our future business and financial results.
In March 2018, we announced that we signed a merger agreement to acquire Oclaro. Our and Oclaro’s obligations to consummate the merger with Oclaro
(the “Merger”) are subject to the satisfaction or waiver of certain conditions. These conditions include, among other customary conditions, adoption by Oclaro
stockholders of the Merger Agreement, which occurred on July 10, 2018, no action being taken by any governmental entity having jurisdiction enjoining or
otherwise prohibiting consummation of the Merger or instituting proceedings seeking the same, no law having been passed by any governmental entity making the
consummation of the Merger illegal, receipt of certain specified regulatory approvals in the United States and the People’s Republic of China, which closing
condition was satisfied with respect to the United States on April 4, 2018 when the parties received early termination of the waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), approval by NASDAQ for listing of the shares of our common stock to be issued in the
Merger, accuracy of representations and warranties of the parties to the applicable standard provided by the Merger Agreement, no event occurring that had or
would reasonably be expected to have a Material Adverse Effect (as defined below in the Merger Agreement) on us or Oclaro, compliance by the parties with their
covenants in the Merger Agreement in all material respects and the effectiveness of the registration statement relating to the Merger, which occurred on May 31,
2018.
Additionally, a portion of the cash consideration to be paid in connection with the Merger is being funded with the proceeds of debt financing commitments
obtained by us. Although obtaining the proceeds of any debt financing, including the financing under the Commitment Letter, is not a condition to the
consummation of the Merger, any failure by us to obtain any portion of the debt financing contemplated by the Commitment Letter (or any alternative financing)
may result in the failure of the Merger to be consummated.
In addition, if the Merger is not completed on or before 5:00 p.m. Pacific Time on December 11, 2018 (subject to a potential extension to March 11, 2019),
either we or Oclaro may choose to terminate the Merger Agreement. We or Oclaro may also elect to terminate the Merger Agreement in certain other
circumstances, and the parties can mutually decide to terminate the Merger Agreement at any time prior to the closing of the Merger, before or after Merger has
been approved by Oclaro’s stockholders, as applicable.
If the Merger is terminated or otherwise not completed, we would not realize any of the expected benefits of the Merger and may suffer other consequences
that could adversely affect our business, results of operations and stock price, including, among others:
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we could be required to pay a termination fee of up to $80.0 million under specified circumstances relating to failure to obtain regulatory
approvals;
we will have incurred and may continue to incur costs relating to the Merger, many of which are payable by us whether or not the Merger is
completed;
matters related to the Merger (including integration planning) require substantial commitments of time and resources by our management team
and numerous others throughout our organization, which could otherwise have been devoted to other opportunities;
we are, and may continue to be, subject to legal proceedings related to the Merger or the failure to complete the Merger, which could be time
consuming and expensive, could divert our management’s attention away from our regular business and, if any lawsuit is adversely resolved
against us, could have a material adverse effect on our financial condition;
the failure to complete the Merger may result in negative publicity and a negative perception of us in the investment community, which could
negative impact on our stock price; and
any disruptions to our business resulting from the announcement and pendency of the Merger, including any adverse changes in our relationships
with our customers, suppliers, partners or employees, may continue to intensify in the event the Merger is not consummated.
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The Merger is subject to the expiration of an applicable waiting period under, and the receipt of approvals, consents or clearances from, antitrust
regulatory authorities in the People’s Republic of China that may impose conditions that could have an adverse effect on us or, if not obtained, could prevent
completion of the Merger.
Before the Merger may be completed, the waiting period (or extension thereof) applicable to the Merger must have expired or been terminated, and any
approvals, consents or clearances required in connection with the Merger must have been obtained, in each case, under the antitrust and competition laws of the
People’s Republic of China. In deciding whether to grant the required regulatory approval, consent or clearance, the relevant governmental authorities will consider
the effect of the Merger on competition within their jurisdiction, and other considerations they may deem appropriate. The terms and conditions of the approvals,
consents and clearances that are granted may impose requirements, limitations or costs or place restrictions on the conduct of our business, any of which may
adversely affect our financial position and prospects and our ability to achieve the cost savings and other synergies projected to result from the Merger.
The terms and conditions of the approvals, consents and clearances that are granted may impose requirements, limitations or costs or place restrictions on the
conduct of our business, any of which may adversely affect our financial position and prospects and our ability to achieve the cost savings and other synergies
projected to result from the Merger.
We face risks if the Merger is completed, including those related to the integration of Oclaro’s business, our cash resources and financial results,
undisclosed liabilities, and employee and customer retention.
If the Merger is completed, we will be required to devote significant management attention and resources to integrating the business practices and operations
of Oclaro with our business. Due to legal restrictions, we and Oclaro have only been able to conduct limited planning regarding the integration of Oclaro into our
business after completion of the Merger and we have not yet determined the exact nature of how the businesses and operations of Oclaro will be run following the
Merger. Potential difficulties we may encounter as part of the integration process include those related to the costs of integration and compliance, diversion of
management’s attention, our ability to create and enforce uniform standards, controls, procedures, policies and information systems, potential unknown liabilities,
and unforeseen increased expenses or delays.
In connection with the Merger, we have agreed to pay an aggregate cash purchase price of approximately $416 million from the combined company’s balance
sheet. We have further entered into a commitment letter with Deutsche Bank Securities Inc. and Deutsche Bank AG New York, New York Branch (the
“Commitment Party”), pursuant to which, subject to the terms and conditions set forth therein, the Commitment Party has committed to provide a senior secured
term loan facility in an aggregate principal amount of up to $550 million with a provision for additional senior secured term loans in an aggregate principal amount
not to exceed $250 million (collectively, the “Term Loan Facilities”). The use of a significant portion of our cash and the incurrence of substantial indebtedness in
connection with the financing of the Merger will reduce our liquidity, and may limit our flexibility in responding to other business opportunities and increase our
vulnerability to adverse economic and industry conditions.
Our due diligence review of Oclaro in connection with the Merger may not have discovered undisclosed liabilities of Oclaro. If Oclaro has undisclosed
liabilities, Lumentum as a successor owner may be responsible for such undisclosed liabilities. Such undisclosed liabilities could have an adverse effect on the
business and results of operations and may adversely affect the value of our common stock after the consummation of the Merger.
The Merger may also result in significant charges or other liabilities that could adversely affect our results of operations, such as cash expenses and non-cash
accounting charges incurred in connection with our acquisition and/or integration of the business and operations of Oclaro. In addition, our failure to identify or
accurately assess the magnitude of certain liabilities we are assuming in the Merger could result in unexpected litigation or regulatory exposure, unfavorable
accounting charges, unexpected increases in taxes due, a loss of anticipated tax benefits or other adverse effects on our business, results of operations, financial
condition or cash flows.
Uncertainties about the Merger may cause our or Oclaro’s current and prospective employees to experience uncertainty about their futures. These uncertainties
may impair our ability to retain, recruit or motivate key management, engineering, technical and other personnel. Similarly, our or Oclaro’s existing or prospective
customers, suppliers and/or partners may delay, defer or cease purchasing products or services from or providing products or services to us or Oclaro; delay or
defer other decisions concerning us or Oclaro; or otherwise seek to change the terms on which they do business with us or Oclaro. Any of the above could harm us
and/or Oclaro, and thus decrease the benefits we expect to receive from the Merger.
Furthermore, we face indirect reputational and business risks with respect to events that affect Oclaro’s business during the pendency of the transaction and
following the closing. For example, Oclaro has publicly disclosed that ZTE has been among its customers. In April 2018, ZTE was added to the BIS’s List of
Denied Persons. While ZTE was removed from the List of Denied Persons in July 2018, any of Oclaro’s customers that are, have been or become subject to U.S.
regulatory scrutiny or export restrictions could negatively impact our business, including by subjecting us to actual or perceived reputational harm among current
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or prospective investors, suppliers or customers, customers of our customers, other parties doing business with us, or the general public. Any such reputational
harm could result in the loss of investors, suppliers or customers, which could harm our business, financial condition, operating results or prospects. Any of these
factors could adversely affect our ability following the Merger to maintain relationships with customers, suppliers, employees and other constituencies or its ability
to achieve the anticipated benefits of the Merger, including anticipated synergies, or could reduce the earnings or otherwise adversely affect our business and
financial results after the Merger.
We do not expect to pay dividends on our common stock.
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, if any, is 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 Separation. 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 of $24.63, which is equal to 125% of the volume weighted average price per share of our
common stock in the five “regular-way” trading days following the Separation. Any shares of our common stock that may be issued upon conversion of the Series
A Preferred Stock would dilute the ownership interests of existing stockholders and any sales in the public market of the common stock issuable upon such
conversion could adversely affect prevailing market prices of our common 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.
Cumulative senior dividends on the Series A Preferred Stock will accrue at the annual rate of 2.5%, but will be paid only when and if declared by the board of
directors of Lumentum Inc. 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 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 our 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 we consent 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 our behalf; any action asserting breach of fiduciary duty, or other wrongdoing, by our directors, officers or other
employees to us or our 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.
Servicing our 2024 Notes and the Term Loan Facilities may require a significant amount of cash, and we may not have sufficient cash flow or the ability
to raise the funds necessary to satisfy our obligations under the 2024 Notes or the Term Loan Facilities, and our current and future indebtedness may limit our
operating flexibility or otherwise affect our business.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2024 Notes and, following the
closing of the Term Loan Facilities, which is expected to occur substantially concurrently with the closing of the Merger, the Term Loan Facilities, or to make cash
payments in connection with any conversion of 2024 Notes or upon any fundamental change if note holders require us to repurchase their notes for cash, depends
on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow
from operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are unable to generate such cash flow, we may
be required to adopt one or more alternatives, such as selling assets, restructuring indebtedness or obtaining additional equity capital on terms that may be onerous
or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to
engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, our existing
and future indebtedness could have important consequences to our stockholders and significant effects on our business. For example, it could:
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make it more difficult for us to satisfy our debt obligations, including the 2024 Notes and the Term Loan Facilities;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability
of our cash flow to fund working capital and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
restrict us from exploiting business opportunities;
place us at a competitive disadvantage compared to our competitors that have less indebtedness; and
limit our availability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of
our business strategy or other general purposes.
Transactions relating to our 2024 Notes may dilute the ownership interest of existing stockholders, or may otherwise depress the price of our common
stock.
If the 2024 Notes are converted by holders, we have the ability under the indenture for the 2024 Notes to deliver cash, equity, common stock, or any
combination of cash or common stock, at our election upon conversion of the 2024 Notes. If we elect to deliver common stock upon conversion of the 2024 Notes,
it would dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely
affect prevailing market prices of our common stock. In addition, certain holders of the 2024 Notes may engage in short selling to hedge their position in the 2024
Notes. Anticipated future conversions of such 2024 Notes into shares of our common stock could depress the price of our common stock.
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The terms of the definitive documents governing the Term Loan Facilities will restrict our operations, particularly our ability to respond to changes or to
take certain actions.
The definitive documents governing the Term Loan Facilities provided for in the Commitment Letter will contain a number of restrictive covenants that
impose operating and financial restrictions on us and may limit its ability to engage in acts that may be in our long-term best interest, including restrictions on the
ability to: incur indebtedness, grant liens, undergo certain fundamental changes, dispose of assets, make investments, enter into transactions with affiliates, and
make certain restricted payments, in each case subject to limitations and exceptions to be set forth in the definitive documentation for the Term Loan Facilities.
The definitive documentation governing the Term Loan Facilities will also contain customary events of default that include, among other things, certain
payment defaults, covenant defaults, cross-defaults to other indebtedness, change of control defaults, judgment defaults, and bankruptcy and insolvency defaults.
Such events of defaults may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or
cross-default provision applies which could have a material adverse effect on our business, operations and financial results. Furthermore, if we are unable to repay
the amounts due and payable under the credit agreements, those lenders could proceed against the collateral granted to them to secure that indebtedness which
could force us into bankruptcy or liquidation. In the event our lenders accelerated the repayment of the borrowings, we may not have sufficient assets to repay that
indebtedness. Any acceleration of amounts due under the credit agreements would likely have a material adverse effect on us. As a result of these restrictions, we
may be: limited in how we conduct business; unable to raise additional debt or equity financing to operate during general economic or business downturns; or
unable to compete effectively or to take advantage of new business opportunities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
We own and lease various properties in the United States and nine 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 30, 2018 , our leased and owned properties in total were approximately 1,200,000 square feet, of which we
owned approximately 650,000 square feet, including a 560,000 square feet manufacturing site in Thailand. 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 the aggregate, will not have a material adverse impact on our financial position, results of operations or 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.
In connection with our acquisition of Oclaro, seven lawsuits were filed by purported stockholders of Oclaro challenging the proposed merger (the “Merger”).
Two of the seven suits were putative class actions filed against Oclaro, its directors, Lumentum, Prota Merger Sub, Inc. and Prota Merger, LLC: Nicholas Neinast
v. Oclaro, Inc., et al., No. 3:18-cv-03112-VC, in the United States District Court for the Northern District of California (filed May 24, 2018) (the “Neinast
Lawsuit”); and Adam Franchi v. Oclaro, Inc., et al., No. 1:18-cv-00817-GMS, in the United States District Court for the District of Delaware (filed June 9, 2018)
(the “Franchi Lawsuit). Both the Neinstat Lawsuit and the Franchi Lawsuit were voluntarily dismissed with prejudice.
The other five suits, styled as Gerald F. Wordehoff v. Oclaro, Inc., et al., No. 5:18-cv-03148-NC (the “Wordehoff Lawsuit”), Walter Ryan v. Oclaro, Inc., et
al., No. 3:18-cv-03174-VC (the “Ryan Lawsuit”), Jayme Walker v. Oclaro, Inc., et al., No. 5:18-cv-03203-EJD (the “Walker Lawsuit”), Kevin Garcia v. Oclaro,
Inc., et al., No. 5:18-cv-03262-VKD (the “Garcia Lawsuit”), and SaiSravan B. Karri v. Oclaro, Inc., et al., No. 3:18-cv-03435-JD (the “Karri Lawsuit” and,
together with the other six lawsuits, the “Lawsuits”), were filed in the United States District Court for the Northern District of California on May 25, 2018, May 29,
2018, May 30, 2018, May 31, 2018, and June 9, 2018, respectively. These five Lawsuits named Oclaro and its directors as defendants only and did not name
Lumentum. The Wordehoff, Ryan, Walker, and Garcia Lawsuits have been voluntarily dismissed, and the Wordehoff, Ryan, and Walker dismissals were with
prejudice. The Karri Lawsuit has not yet been dismissed. The Ryan Lawsuit was, and the Karri Lawsuit is, a putative class action.
The Lawsuits generally alleged, among other things, that Oclaro and its directors violated Section 14(a) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), and Rule 14a-9 promulgated thereunder by disseminating an incomplete and misleading Form S-4, including proxy statement/prospectus.
The Lawsuits further alleged that Oclaro’s directors violated Section 20(a) of the Exchange Act by failing to exercise proper control over the person(s) who
violated Section 14(a) of the Exchange Act.
The remaining Lawsuit (the Karri Lawsuit) currently purports to seek, among other things, injunctive relief preventing the parties from consummating the
Merger, damages to be awarded to the plaintiff and any class if the Merger is consummated, and litigation costs, including attorneys’ fees. The defendants intend to
defend the Karri Lawsuit vigorously.
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
From August 4, 2015 , our common stock has traded on the NASDAQ Stock Market under the symbol “LITE”. The following table sets forth the range of
high and low closing prices of our common stock per the NASDAQ Global Select Market for the periods indicated:
Fiscal 2018 Quarter Ended:
June 30, 2018
March 31, 2018
December 30, 2017
September 30, 2017
Fiscal 2017 Quarter Ended:
July 1, 2017
April 1, 2017
December 31, 2016
October 1, 2016
High
Low
64.50 $
73.20 $
64.75 $
67.95 $
65.10 $
54.70 $
44.50 $
41.99 $
50.20
42.60
46.40
50.80
42.75
34.40
33.60
23.30
$
$
$
$
$
$
$
$
According to records of our transfer agent, we had 2,530 stockholders of record as of August 23, 2018 and we believe there is a substantially greater number
of beneficial holders.
Dividends
Our subsidiary, Lumentum Inc., issued $35.8 million in Series A Preferred Stock to Viavi, which was sold to Amada following the Separation. Holders of
Series A Preferred Stock, in preference to holders of Lumentum Inc.’s common stock or any other class or series of its outstanding capital stock ranking in any
such event junior to the Series A Preferred Stock, are entitled to receive, when and as declared by the board of directors, quarterly cumulative cash dividends at the
annual rate of 2.5% of the Issuance Value per share on each outstanding share of Series A Preferred Stock. The accrued dividends are payable on March 31, June
30, September 30 and December 31 of each year commencing on September 30, 2015. During fiscal 2018, Lumentum Inc. paid $0.7 million in dividends to the
holders of Series A Preferred Stock.
Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or
incorporated by reference into any filing of Lumentum Holdings Inc. under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be
expressly set forth by specific reference in such filing.
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The following graph compares the cumulative total return of our common stock with the total return for the NASDAQ Composite Index (the “IXIC”) and the
NASDAQ 100 Technology Sector Index (the “NDXT”) from August 4, 2015 through June 30, 2018. The stock price performance on the following graph is not
necessarily indicative of future stock price performance.
Recent Sale of Unregistered Equity Securities
None.
Issuer Purchases of Equity Securities
None.
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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 and our audited consolidated financial statements included in Item 8 of this Annual Report. The selected data in this section are not intended to
replace the Consolidated Financial Statements included in this Annual Report.
Our historical consolidated 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. There were no allocations of expenses from Viavi for the fiscal years ended June 30, 2018 or July 1, 2017. 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 entirety of the periods presented or be indicative of our future performance as an
independent company.
Consolidated Statements of Operations Data:
Net revenue
Gross profit
Income (loss) from operations
Net (loss) income
Cumulative dividends on Series A Preferred Stock
Accretion of Series A Preferred Stock
Earnings allocated to Series A Preferred Stock
Net income (loss) attributable to common stockholders
Net income (loss) per share attributable to common
stockholders (3):
Basic
Diluted
Shares used to compute net income (loss) per share
attributable to common stockholders (3) :
Basic
Diluted
June 30, 2018
July 1, 2017 (4)
July 2, 2016
June 27, 2015 (1)
June 28, 2014 (2)
Years Ended
$
1,247.7 $
1,001.6 $
903.0 $
837.1 $
$
$
$
432.1
139.9
248.1
(0.9)
—
(5.7)
318.1
47.6
(102.5)
(0.9)
—
—
277.3
11.5
9.3
(0.8)
(11.7)
—
257.9
(23.4)
(3.4)
—
—
—
241.5 $
(103.4) $
(3.2) $
(3.4) $
3.88 $
3.82 $
(1.71) $
(1.71) $
(0.05) $
(0.05) $
(0.06) $
(0.06) $
60.6
60.6
59.1
59.1
58.8
58.8
62.3
63.3
34
817.9
256.6
8.7
10.7
—
—
—
10.7
0.18
0.18
58.8
58.8
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Consolidated Balance Sheet Data:
Cash and cash equivalents
Total assets
Convertible notes
Derivative liability
Other non-current liabilities
Total redeemable convertible preferred stock
Total stockholders’ equity
June 30, 2018
July 1, 2017 (4)
July 2, 2016
June 27, 2015 (1)
June 28, 2014 (2)
Balance as of
$
397.3 $
272.9 $
1,581.5
334.2
52.4
19.0
35.8
926.1
1,232.9
317.5
51.6
25.0
35.8
618.8
157.1 $
726.3
—
10.3
9.1
35.8
497.4
14.5 $
512.6
—
—
9.8
—
380.6
19.9
492.1
—
—
19.6
—
335.6
(1) 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.
(2) 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 Consolidated Statement of Operations for fiscal 2014 included the results of operations from Time-Bandwidth subsequent to
the date of acquisition, and the Consolidated Balance Sheets as of June 28, 2014 included Time-Bandwidth’s financial position.
(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 income (loss) 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 ” in the Notes to Consolidated Financial Statements.
(4) During the third quarter of fiscal 2017, we completed the acquisition of a privately held company in accordance with the authoritative guidance on
business combinations. Results of operations and financial position of the business acquired have been included in our consolidated financial statements
subsequent to the date of acquisition.
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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 consolidated financial statements and the corresponding notes included elsewhere
in this Annual Report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The
matters discussed in these forward-looking statements are subject to risk, uncertainties and other factors that could cause actual results to differ materially from
those made, projected or implied in the forward-looking statements. Please see “Risk Factors” and “Forward-Looking Statements” for a discussion of the
uncertainties, risks and assumptions associated with these statements.
Overview
We are an industry leading provider of optical and photonic products defined by revenue and market share addressing a range of end-market applications
including optical communications and commercial lasers. We have two operating segments: OpComms and Lasers. The two operating segments were primarily
determined based on how the Chief Operating Decision Maker (“CODM”) views and evaluates our operations. Operating results are regularly reviewed by the
CODM to make decisions about resources to be allocated to the segments and to assess their performance. Other factors, including market separation and customer
specific applications, go-to-market channels, products and manufacturing, are considered in determining the formation of these operating segments.
We see the world as becoming more reliant on ever-increasing amounts of data flowing through optical networks and data centers, which demand new
networks and data centers to be built to satisfy this insatiable demand for data. As higher levels of precision, new materials, factory and energy efficiency are being
demanded by manufacturers, suppliers of manufacturing tools globally are turning more and more to laser based approaches, including the types of lasers
Lumentum supplies. Laser based 3D sensing is a rapidly developing market. The technology enables computer vision applications that enhance security, safety,
and new functionality in the electronic devices that people rely on every day. We believe the global markets in which Lumentum participates have fundamentally
robust, long-term trends that increase the need for our photonics products and technologies.
During fiscal 2018, we made good progress on our key strategic objectives that accelerated growth, margin expansion, and customer and end-market
diversification. We ramped new major product lines in 3D sensing for mobile devices and engaged numerous customers globally, which we believe will facilitate
future product and customer expansion.
OpComms
Our OpComms products address the following markets: Telecom, Datacom and Consumer and Industrial.
Our OpComms products include a wide range of components, modules and subsystems to support and maintain customers including carrier networks for
access (local), metro (intracity), long-haul (city-to-city and worldwide) and, submarine (undersea). Additionally, our products address enterprise, cloud, and data
center applications, including SANs, LANs, and 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 these fast growing OpComms markets through our extensive product portfolio, including ROADMs, tunable
10-gigabit small form-factor pluggable transceivers and tunable small form-factor pluggable transceivers. Our 10G, 40G legacy transceivers and a growing
portfolio of 100G pluggable transceivers support LAN/SAN/WAN needs and the cloud for customers building enterprise and hyperscale data center networks.
Additionally, we are engaging customers in the sale of laser chips for use in the manufacture of high-speed transceivers.
In the Consumer and Industrial market, our OpComms products include laser light sources, which are integrated into 3D sensing platforms being used in
applications for mobile devices, gaming, computers, and other consumer electronics devices. New emerging applications include virtual and augmented reality, as
well as automotive and industrial segments. Our products include VCSELs and edge emitting lasers which are used in 3D sensing depth imaging systems. These
systems simplify the way people interact with technology by enabling the use of natural user interfaces. Systems are used for biometric identification, surveillance,
and process efficiency, among numerous other application spaces. Emerging applications for this technology include various mobile device applications,
autonomous vehicles, self-navigating robotics and drones in industrial applications and 3D capture of objects coupled with 3D printing. In addition, our industrial
diode lasers are used primarily as pump sources for pulsed and CW Fiber Lasers.
Our OpComms customers include Accelink, Alphabet (formerly Google), Apple, Arista, Arris, Ciena, Cisco Systems, Coriant, ECI, Facebook, FiberHome,
Fujitsu, HiSilicon, Huawei Marine, Huawei Technologies, Infinera, Microsoft, NEC, Nokia Networks (including Alcatel-Lucent International), O-Net, Oplink,
Padtec, TE Subcom, and Yahoo.
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Lasers
Our Lasers products serve our customers in markets and applications such as sheet metal processing, general manufacturing, biotechnology, graphics and
imaging, remote sensing, and precision machining such as drilling in printed circuit boards, wafer singulation, glass cutting and solar cell scribing.
Our Lasers products are used in a variety of OEM applications including diode-pumped solid-state, fiber, diode, direct-diode and gas lasers such as argon-ion
and helium-neon lasers. Fiber lasers provide kW-class output powers combined with excellent beam quality and are used in sheet metal processing and metal
welding applications. Diode-pumped solid-state 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.
We also provide high-powered and ultrafast lasers for the industrial and scientific markets. Manufacturers use high-power, ultrafast lasers to create micro
parts for consumer electronics and to process semiconductor, LED, and other types of 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, ASML Holding, Beckman Coulter, Becton, Dickinson and Company, DISCO, Electro Scientific Industries, EO
Technics, Han’s Laser Technology, and KLA-Tencor.
Acquisition of Oclaro
On March 11, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Oclaro, Inc. (“Oclaro”), Prota Merger Sub, Inc., and
Prota Merger, LLC, pursuant to which we will acquire Oclaro and Oclaro will become a wholly-owned subsidiary of Lumentum. In accordance with the terms of
the Merger Agreement, each issued and outstanding share of Oclaro common stock will be exchanged for $5.60 in cash and 0.0636 of a share of Lumentum
common stock, subject to the conditions and restrictions set forth in the Merger Agreement. The total transaction consideration was approximately $1.8 billion as
of the date of the Merger Agreement. Oclaro stockholders will own approximately 16% of the combined company following the closing. Oclaro’s stockholders
approved the Merger Agreement on July 10, 2018 and we have received approval for the transaction under the Hart-Scott Rodino Act in the United States. We are
in the process of obtaining antitrust approval in China. The Merger Agreement contains certain termination rights for both Lumentum and Oclaro. The Merger
Agreement further provides that upon termination of the Merger Agreement under specified circumstances relating to failure to obtain regulatory approvals,
Lumentum may be required to pay Oclaro a termination fee of $80 million.
As of August 23, 2018, the total transaction consideration was expected to be approximately $1.7 billion, which would be funded by a combination of $700
million in Lumentum common stock, $500 million in new debt, and the remaining amount from the cash balances of the combined company.
Separation from JDSU
Lumentum Holdings Inc. was incorporated in Delaware as a wholly owned subsidiary of JDS Uniphase Corporation (“JDSU”) on February 10, 2015 and is
comprised of the former communications and commercial optical products (“CCOP”) segment and the WaveReady product lines of 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 (the
“Separation”). Each JDSU stockholder of record as of the close of business on 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 in connection with the Separation and retained ownership of 19.9% of Lumentum’s
outstanding shares. Since the Separation, Viavi has sold a significant portion of its shares and is no longer a significant shareholder of Lumentum.
On July 31, 2015, prior to the Separation, Viavi transferred substantially all of the assets and liabilities and operations of the CCOP segment and WaveReady
product lines to Lumentum. Our financial statements for periods prior to the Separation were prepared on a stand-alone basis and were derived from Viavi’s
consolidated financial statements and accounting records. For the period from June 28, 2015 to August 1, 2015, 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 us.
The consolidated financial statements include certain assets and liabilities that were historically held at the Viavi level but which were transferred to us in the
Separation. Viavi’s debt and related interest expense were not attributed or allocated to us for
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the periods presented since we are not the legal obligor of the debt and Viavi’s borrowings were not directly attributable to us. Certain intercompany transactions
between us and Viavi were considered to be effectively settled in the consolidated financial statements at the time the transactions were recorded. The total net
effect of the settlement of these intercompany transactions is reflected in our consolidated statements of cash flows as a financing activity and on the consolidated
balance sheets as Viavi net investment.
The consolidated statements of operations include 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 through the Separation. 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 as well as
other public company costs. 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.
There were no allocations of expenses from Viavi for the fiscal years ended June 30, 2018 or July 1, 2017. Refer to “ Note 3. Related Party Transactions ” in
the Notes to Consolidated Financial Statements for allocations during the fiscal year ended July 2, 2016.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to
make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its
estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge
of current events and actions that may impact us in the future, actual results may be different from the estimates. Our critical accounting policies are those that
affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are short-term investments,
impairment of marketable and non-marketable securities, inventory valuation, goodwill and intangibles, long-lived asset valuation, pension benefits, revenue
recognition, stock-based compensation, income taxes, restructuring, derivative liabilities, business combinations, and warranty.
Our consolidated financial statements are prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board’s Accounting
Standards Codification (“ASC”), and we consider the various staff accounting bulletins and other applicable guidance issued by the United States Securities and
Exchange Commission (“SEC”). GAAP, as set forth within the ASC, requires us to make certain estimates, judgments and assumptions. We believe that the
estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are differences between these estimates,
judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates,
judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the
following:
•
•
•
•
•
•
•
•
Inventory Valuation
Revenue Recognition
Income Taxes
Long-lived Asset Valuation
Warranty
Derivative Liability
Business Combinations
Goodwill
On March 11, 2018, we entered into an Agreement and Plan of Merger with Oclaro, Prota Merger Sub, Inc., and Prota Merger, LLC, which was unanimously
approved by the boards of directors of both Lumentum and Oclaro. The transaction is subject to customary closing conditions and is expected to close in the
second half of calendar 2018. We added Business Combinations and Goodwill to our critical accounting policies and estimates in the third quarter of fiscal 2018.
Inventory Valuation
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
value of our inventory on a quarterly basis and write down those inventories which are obsolete or in excess of our forecasted usage to the lower of their cost or
estimated net realizable value. Our estimates of realizable value
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are based upon our analysis and assumptions including, but not limited to, forecasted sales levels and historical usage 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 minimize 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.
Revenue Recognition
During the periods presented, we recognized 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.
We record as a reduction to revenues reserves for sales returns based upon historical experience rates and for any specific known customer amounts. We also
provide certain distributors and OEMs with volume-pricing discounts, such as rebates and incentives, which are recorded as a reduction to revenues at the time of
sale. Historically these volume discounts have not been significant. For revenue recognition changes related to implementation of ASU 2014-09, refer to “Note 2.
Recent Accounting Pronouncements”.
Income Taxes
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 consolidated 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. We consider future growth, forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law, and
prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to
realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period
in which we make such a determination, or goodwill would be adjusted at our final determination of the valuation allowance related to an acquisition within the
measurement period. If we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion
of the previously provided valuation allowance as an adjustment to earnings at such time.
We are subject to income tax audits by the respective tax authorities of the jurisdictions in which we operate. The determination of our income tax liabilities
in each of these jurisdictions requires the interpretation and application of complex, and sometimes uncertain, tax laws and regulations. The authoritative guidance
on accounting for income taxes prescribes both recognition and measurement criteria that must be met for the benefit of a tax position to be recognized in the
financial statements. If a tax position taken, or expected to be taken, in a tax return does not meet such recognition or measurement criteria, an unrecognized tax
benefit liability is recorded. If we ultimately determine that an unrecognized tax benefit liability is no longer necessary, we reverse the liability and recognize a tax
benefit in the period in which it is determined that the unrecognized tax benefit 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.
Long-lived Asset Valuation
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
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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.
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 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.
Derivative Liability
The Series A Preferred Stock issued by our subsidiary Lumentum Inc. is redeemable at the option of the holder after five years and classified as non-
controlling interest redeemable convertible preferred stock in our consolidated balance sheet and is measured at its redemption value. The Series A Preferred Stock
conversion feature is bifurcated from the Series A Preferred Stock and accounted for separately as a derivative liability. In March 2017, we issued
$450.0 million in aggregate principal amount of 0.25% Convertible Senior Notes due in March 2024 (the “2024 Notes”), unless earlier repurchased by us or
converted pursuant to their terms. Prior to the Tax Matters Agreement settlement condition (“TMA settlement condition”), because we could only settle the 2024
Notes in cash, we determined that the conversion feature met the definition of a derivative liability. We separated the derivative liability from the host debt
instrument based on the fair value of the derivative liability. On June 29, 2017, we met the requirements to account for the conversion option of the 2024 Notes as
equity and the conversion option is no longer marked to market. On a quarterly basis, the derivative liability for the Series A Preferred Stock is marked to market
based on the fair value of the conversion feature, with the resulting income or loss recorded as unrealized loss on the derivative liabilities on our consolidated
statements of operations. The determination of fair value includes various inputs, including volatility and interest rate assumptions. However, the change in the fair
value of our common stock has the largest impact to the fair value of the derivatives. During fiscal 2018, 2017, and 2016, we recognized unrealized loss on
derivative liabilities of $0.8 million, $104.2 million, and $0.6 million, respectively.
Business Combinations
In accordance with the guidance for business combinations, we determine whether a transaction or other event is a business combination, which requires that
the assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method. If the assets
acquired are not a business, we account for the transaction or other event as an asset acquisition. Under both methods, we recognize the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquired entity. We capitalize acquisition-related costs and fees associated with asset acquisitions and
immediately expense acquisition-related costs and fees associated with business combinations.
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated
fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When
determining the fair values of assets acquired and liabilities assumed, we make significant estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer relationships and acquired
developed technology and discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable and, as a result, actual results may differ materially from estimates. Other estimates associated with the accounting for acquisitions may change as
additional information becomes available regarding the assets acquired and liabilities assumed. Any change in facts and circumstances that existed as of the
acquisition date and impacts our preliminary estimates is recorded to goodwill if identified within the measurement period. Subsequent to the measurement period
or our final determination of fair value of assets and liabilities whichever is earlier the adjustments will affect our earnings.
In addition, we estimate the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our
estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.
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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.
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 estimate the fair value of a reporting unit using market approach, income approach or a combination of market and income approach.
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. Significant estimates in
the income approach include: future cash flows, discount rates.
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.
Based on the impairment analysis performed in the fourth quarter of each year presented, the fair value of our reporting unit substantially exceeded the
carrying value; as such, our annual qualitative assessment did not indicate that a more detailed quantitative analysis was necessary.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its
application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our
senior management has reviewed our critical accounting policies and related disclosures with the Audit Committee of our board of directors.
Recently Issued Accounting Pronouncements
Refer to “ Note 2. Recent Accounting Pronouncements ” in the Notes to Consolidated Financial Statements.
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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 Consolidated Statements of Operations items as a percentage of net revenue:
Segment net revenue:
OpComms
Lasers
Net revenue
Cost of sales
Amortization of acquired developed technologies
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Restructuring and related charges
Total operating expenses
Income from operations
Unrealized loss on derivative liabilities
Interest and other income (expense), net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Financial Data for Fiscal 2018, 2017 and 2016
June 30, 2018
Years Ended
July 1, 2017
July 2, 2016
84.9 %
85.6 %
84.3 %
15.1
100.0
65.1
0.3
34.6
12.6
10.3
0.6
23.4
11.2
(0.1)
(0.8)
10.4
(9.5)
14.4
100.0
67.6
0.6
31.8
14.8
11.0
1.2
27.0
4.8
(10.4)
(0.3)
(6.0)
4.3
15.7
100.0
68.5
0.8
30.7
15.6
13.0
0.8
29.4
1.3
(0.1)
(0.1)
1.1
0.1
19.9 %
(10.2)%
1.0 %
The following table summarizes selected Consolidated Statements of Operations items ( in millions, except for percentages ):
2018
2017
Change
Percentage
Change
2017
2016
Change
Percentage
Change
Segment net revenue:
OpComms
Lasers
Net revenue
Gross profit
Gross margin
Research and development
$
$
$
$
1,059.2
$
857.8
$
201.4
23.5 % $
857.8
$
761.3
$
96.5
12.7 %
188.5
143.8
44.7
31.1
143.8
1,247.7
$
1,001.6
$
246.1
24.6 % $
1,001.6
$
141.7
903.0
2.1
1.5
$
98.6
10.9 %
432.1
$
318.1
$
114.0
35.8 % $
318.1
$
277.3
$
40.8
14.7 %
34.6%
31.8%
31.8%
30.7%
156.8
$
148.3
$
8.5
5.7 % $
148.3
$
141.1
$
7.2
5.1 %
Percentage of net revenue
12.6%
14.8%
14.8%
15.6%
Selling, general and
administrative
$
128.2
$
110.2
$
18.0
16.3 % $
110.2
$
117.3
$
(7.1)
(6.1)%
Percentage of net revenue
10.3%
11.0%
11.0%
13.0%
Restructuring and related
charges
Percentage of net revenue
$
7.2
$
12.0
$
(4.8)
(40.0)% $
12.0
$
0.6%
1.2%
1.2%
7.4
$
0.8%
4.6
62.2 %
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Net Revenue
Net revenue increased by $ 246.1 million , or 24.6% during fiscal 2018 compared to fiscal 2017 . This increase was primarily due to record revenues in 3D
sensing, TrueFlex ® ROADMs, commercial lasers, and industrial diode lasers.
OpComms net revenue increased $ 201.4 million , or 23.5% , during fiscal 2018 compared to fiscal 2017 , driven by increased sales of Consumer and
Industrial products of $386.7 million, primarily in 3D sensing fo r mobile devices and engage numerous customers globally, partially offset by decreased sales of
Telecom and Datacom products.
Lasers net revenue increased $ 44.7 million , or 31.1% , in fiscal 2018 compared to fiscal 2017 , primarily due to increased sales of our kilowatt class fiber
lasers. Growth was driven by strong demand from customers in both the micro and macro material processing markets.
Net revenue increased by $98.6 million, or 10.9%, during fiscal 2017 compared to fiscal 2016. This increase was primarily due to an increase in net revenue
from our OpComms segment. OpComms net revenue increased $96.5 million, or 12.7%, during fiscal 2017 compared to fiscal 2016, driven by increases from
Telecom and 100G Datacom products. Lasers net revenue increased $2.1 million, or 1.5%, in fiscal 2017 compared to fiscal 2016.
During our fiscal 2018 , 2017 , and 2016, net revenue generated from a single end customer that represented 10% or greater of total net revenue is
summarized as follows:
APPLE
HUAWEI
CIENA
CISCO
*Represents less than 10% of total net revenue
June 30, 2018
Years Ended
July 1, 2017
July 2, 2016
30.0%
11.0%
11.0%
*
*
16.7%
18.5%
12.4%
*
17.1%
17.1%
13.0%
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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, however, the location of the
end customers may differ. The following table presents net revenue by the three geographic regions we operate in and net revenue from countries that represented
10% or more of our total net revenue ( in millions, except for percentages ):
Net revenue:
Americas:
United States
Mexico
Other Americas
Total Americas
Asia-Pacific:
Hong Kong
Japan
South Korea
Other Asia-Pacific
Total Asia-Pacific
EMEA
Total net revenue
June 30, 2018
Years Ended
July 1, 2017
July 2, 2016
$
$
$
$
$
$
115.1
145.8
7.0
267.9
183.0
194.7
146.1
354.2
878.0
101.8
9.2% $
11.7
0.6
21.5% $
14.7% $
15.6
11.7
28.3
70.3% $
147.9
185.1
9.2
342.2
226.7
99.2
4.9
220.5
551.3
14.8% $
18.5
0.9
34.2% $
22.6% $
9.9
0.5
22.0
55.0% $
162.3
112.9
19.6
294.8
214.0
92.9
3.8
174.0
484.7
18.0%
12.5
2.2
32.7%
23.7%
10.3
0.4
19.2
53.6%
8.2% $
108.1
10.8% $
123.5
13.7%
1,247.7
$
1,001.6
$
903.0
During fiscal 2018 , 2017 and 2016 , net revenue from customers outside the United States, based on customer shipping location, represented 90.8%, 85.2%
and 82.0% 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. However, regulatory and enforcement actions by U.S. and other governmental agencies, as well as changes in tax and trade policies and tariffs, may
impact net revenue from customers outside the United States in future periods.
Gross Margin and Segment Gross Margin
The following table summarizes segment gross margin for fiscal 2018 , 2017 and 2016 ( in millions, except for percentages ):
OpComms
Lasers
Segment total
Unallocated corporate items (1)
Total
Gross Profit
Gross Margin
2018
2017
2016
2018
2017
2016
$
$
$
402.3 $
287.3 $
82.8
59.9
485.1 $
347.2 $
(53.0)
(29.1)
432.1 $
318.1 $
236.3
61.4
297.7
(20.4)
277.3
38.0%
43.9%
38.9%
33.5%
41.7%
34.7%
31.0%
43.3%
33.0%
34.6%
31.8%
30.7%
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(1) The unallocated corporate items for the years presented include the effects of amortization of acquired developed technologies, share-based compensation
and certain other charges. We do not allocate these items to the gross margin for each segment because management does not include such information in
measuring the performance of the operating segments.
The increase in unallocated corporate items during fiscal 2018 compared to fiscal 2017 , primarily relates to set-up costs of our facility in Thailand, including
costs of transferring the manufacturing of product lines to Thailand of $27.0 million in our fiscal 2018 compared to $1.8 million in fiscal 2017. The increase in
unallocated corporate items during fiscal 2017 compared to fiscal 2016, primarily relates to inventory write-downs due to canceled programs not allocated to the
segments of $7.9 million incurred in fiscal 2017.
Gross Margin
Gross margin in fiscal 2018 increased to 34.6% from 31.8% in fiscal 2017 . The increase was primarily due to increased sales in our 3D sensing and lasers
products, which have higher gross margins than the average for the Company. The increase was partially offset by underutilized capacity costs due to the decline in
Telecom and Datacom demand, higher write-downs of excess and obsolete inventory of $1.2 million, as well as set-up costs of our facility in Thailand, including
costs of transferring product lines to Thailand of $27.0 million in our fiscal 2018 compared to $1.8 million in fiscal 2017.
Gross margin in fiscal 2017 increased to 31.8% from 30.7% in fiscal 2016. This increase was primarily due to an increase in OpComms gross margins,
partially offset by a decrease in Lasers gross margins.
We sell products in certain markets that are consolidating, undergoing product, architectural and business model transitions, have high customer
concentrations, are highly competitive, are price sensitive and/or are affected by customer seasonal and mix variant buying patterns. We expect these factors to
continue to result in variability of our gross margin.
Segment Gross Margin
OpComms
OpComms gross margin in fiscal 2018 increased to 38.0% from 33.5% in fiscal 2017 . This increase was primarily due to increased sales of our 3D sensing
products, which have higher gross margins than the average for the segment. The increase was partially offset by underutilized capacity costs due to the decline in
Telecom and Datacom demand.
OpComms gross margin in fiscal 2017 increased to 33.5% from 31.0% in fiscal 2016. This increase was primarily due to higher revenue volume and product
mix.
Lasers
Lasers gross margin in fiscal 2018 increased to 43.9% from 41.7% in fiscal 2017 . This increase was primarily due to increased sales of solid state lasers
products, which have higher gross margins than the average for the segment.
Lasers gross margin in fiscal 2017 decreased to 41.7% from 43.3% in fiscal 2016. This decrease was primarily due to higher manufacturing and warranty
costs.
Research and Development
R&D expense increased by $ 8.5 million , or 5.7% , in fiscal 2018 compared to fiscal 2017 . The increase in R&D expense was primarily due to the increase
in stock-based compensation of $2.6 million and payroll related expense of $4.1 million, which includes an increase in variable incentive compensation of $2.9
million.
R&D expense increased by $7.2 million, or 5.1%, in fiscal 2017 compared to fiscal 2016. The increase in R&D expense was primarily due to the increase in
the payroll related expense of $8.6 million, which includes an increase of stock-based compensation of $2.6 million. This was partially offset by higher partner
reimbursements for development expense.
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 increased $ 18.0 million , or 16.3% , in fiscal 2018 compared to fiscal 2017. The increase was primarily attributable to increases in stock
based compensation of $6.4 million and payroll related expense of $10.5 million, which includes
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an increase in variable incentive compensation of $3.8 million. We also incurred $4.8 million of costs related to the planned acquisition of Oclaro during our fiscal
2018.
SG&A expense decreased $7.1 million, or 6.1%, in fiscal 2017 compared to fiscal 2016. The decrease was primarily a result of reduced separation related
charges and restructuring expenses of $13.6 million. This decrease was partially offset by an increase in payroll related expense of $7.8 million and an increase in
stock-based compensation of $1.8 million.
We expect to experience in the future certain non-core expenses, such as mergers and acquisition-related expenses and litigation expenses, which will likely
increase our SG&A expenses and potentially impact our profitability expectations in any particular quarter.
Restructuring and Related Charges
We have 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. Refer to “ Note 14. Restructuring and Related Charges ” in the Notes to Consolidated Financial Statements.
During fiscal 2018, we recorded $7.2 million in restructuring and related charges in the consolidated statements of operations.
•
•
During the fourth quarter of fiscal 2018, we initiated a new restructuring plan in order to realign the organization and enable further investment in key
priority areas. As a result, a restructuring charge of $3.4 million was recorded for severance costs and employee benefits. In total, 52 employees in
manufacturing, R&D and SG&A functions were terminated in connection with this new restructuring plan.
We also incurred restructuring and related charges of $3.8 million from restructuring plans approved prior to fiscal 2016 primarily related to the shut
down of our manufacturing facility in Bloomfield, Connecticut as a result of the transfer of certain production processes into existing sites in the United
States or to contract manufacturers.
During fiscal 2017, we recorded $12.0 million in restructuring and related charges. Of the $12.0 million charge recorded during fiscal 2017, $2.1 million
related to severance, retention and employee benefits.
During fiscal 2016, we recorded $7.7 million in restructuring and related charges.
•
•
During the fourth quarter of fiscal 2016, management approved a plan to optimize operations and gain efficiencies throughout the organization. As a
result, a restructuring charge of $0.7 million was recorded for severance and employee benefits during fiscal 2016. In total, 18 employees in
manufacturing, R&D and SG&A functions were terminated in connection with this restructuring plan. Payments related to the remaining severance and
benefits accrual have been paid in full.
We also incurred restructuring and related charges of $7.0 million from restructuring plans approved prior to fiscal 2016 primarily related to
manufacturing transfer costs for transfer of certain production processes into existing sites in the United States or to contract manufacturers.
Interest and Other Income (Expense), Net
The components of interest and other income (expense), net are as follows ( in millions ):
Interest expense
Foreign exchange gains (losses), net
Interest income
Other income (expense), net
Interest and other income (expense), net
Years Ended
June 30, 2018
July 1, 2017
July 2, 2016
$
$
(18.2) $
(5.5) $
(0.3)
8.5
0.3
0.6
1.1
0.6
(9.7) $
(3.2) $
(0.1)
(0.9)
—
(0.2)
(1.2)
During fiscal 2018 , interest and other income (expense), net increased by $6.5 million compared to fiscal 2017 , driven by amortization of the debt discount
on the 2024 Notes of $16.7 million in our fiscal 2018 compared to $5.1 million in fiscal 2017, partially offset by interest income on the short-term investments and
cash equivalents of $8.5 million in our fiscal 2018 compared to $1.1 million in fiscal 2017. Refer to “ Note 11. Convertible Senior Notes ”
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Interest and other income (expense), net was $(3.2) million in fiscal 2017 as compared to $(1.2) million in fiscal 2016. The $2.0 million change was primarily
due to amortization of the debt discount on the 2024 Notes in fiscal 2017 of $5.1 million offset by interest income on the short-term investments and cash
equivalents of $1.1 million.
Unrealized Gain (Loss) on Derivative Liabilities
Unrealized loss on Series A Preferred Stock derivative liability amounted to $ 0.8 million , $41.3 million, and $0.6 million for the fiscal years 2018, 2017,
and 2016, respectively. The change is primarily related to the change in the price of our underlying common stock and is reflected in the consolidated statements of
operations as “Unrealized gain (loss) on derivative liabilities”. For further discussion of our derivative liability, see “ Note 12. Derivative Liability ” in the Notes to
Consolidated Financial Statements.
Unrealized loss on the derivate liability from the 2024 Notes in the amount of $62.9 million is also included in the “Unrealized gain (loss) on derivative
liabilities” of our consolidated statements of operations for the year ended July 1, 2017. On June 29, 2017, we met the requirements to account for the conversion
option of the 2024 Notes as equity and the conversion option is no longer marked to market. Refer to “ Note 11. Convertible Senior Notes ” in the Notes to
Consolidated Financial Statements.
Provision for (Benefit from) Income Taxes (in millions)
Provision for (benefit from) income taxes
Years Ended
June 30, 2018
July 1, 2017
July 2, 2016
$
(118.7) $
42.7 $
0.4
We recorded a provision (benefit) for income taxes of $(118.7) million , $42.7 million , and $0.4 million in fiscal 2018, 2017, and 2016, respectively.
Our provision for income taxes for fiscal 2018 differed from the tax provision based on the U.S. statutory federal income tax rate of approximately 28% as a
result of $207.2 million of income tax benefit related to the release of valuation allowance against our U.S. federal and certain state deferred tax assets, partially
offset by $80.5 million of income tax expense related to the remeasurement of our net deferred tax assets as a result of reduction in the U.S. federal corporate tax
rate. Our provision for income taxes was also impacted by the benefit our foreign income being taxed at lower rates than the U.S. statutory rate, as well as the
benefit of research and development tax credits.
Our provision for income taxes for fiscal 2017 differed from the tax provision based on the then-U.S. statutory federal income tax rate of 35% primarily as a
result of $36.5 million of income tax expense related to the non-deductible unrealized losses associated with the embedded derivatives for the Series A Preferred
Stock and the 2024 Notes, as well as $8.4 million of unrecognized tax benefits, $4.9 million of non-deductible stock-based compensation, and $21.5 million of
changes in the valuation allowance against our deferred tax assets. Our provision for income taxes was also impacted by the benefit of our foreign income being
taxed at lower rates than the U.S. statutory rate, as well as the income tax benefit of research and development tax credits.
Our effective tax rate of 4.1% in fiscal 2016 differed from the then-U.S. statutory federal income tax rate of 35%, primarily due to changes in the valuation
allowance against our deferred tax assets, offset by the benefit of our foreign income being taxed at different rates than the U.S. statutory rates.
As of June 30, 2018, we had net deferred tax assets of $125.3 million, which were mainly comprised of goodwill and intangible assets related to tax assets
established in the spin-off from JDSU.
During fiscal 2018, our subsidiary in Thailand operated under a tax holiday. The tax holiday will expire in fiscal 2025 unless extension is granted by the
Thailand government and we continue to meet the requirements thereunder. If we do not meet the tax holiday requirements or we decide not to extend the tax
holiday, income earned in Thailand will be subject to higher statutory income tax rate, which may cause our effective tax rate to increase.
For further discussion of our income tax provision, see “ Note 15. Income Taxes ” in the Notes to Consolidated Financial Statements.
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Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2018 , and the effect such obligations are expected to have on our liquidity and
cash flow over the next five years ( in millions ):
Contractual Obligations
Asset retirement obligations
Purchase obligations (1)
Operating lease obligations (1)
Capital lease obligation (1)
Pension plan contributions (2)
0.25% Convertible Senior Notes due 2024
Interest on 2024 Notes (3)
Acquisition contingencies (4)
Total
Payments due by period
Total
Less than 1
year
1 - 3 years
3 - 5 years
More than 5
years
$
2.7 $
— $
1.0 $
0.4 $
173.5
30.8
9.4
0.5
450.0
6.7
3.0
165.5
11.6
9.0
0.5
—
1.1
—
7.9
11.6
0.4
—
—
2.2
3.0
—
5.8
—
—
—
2.2
—
1.3
0.1
1.8
—
—
450.0
1.2
—
$
676.6 $
187.7 $
26.1 $
8.4 $
454.4
(1) Refer to “ Note 18. Commitments and Contingencies ” in the Notes to Consolidated Financial Statements.
(2) Represents planned contributions to our pension plan. Although additional future contributions will be required, the amount and timing of these
contributions will be affected by actuarial assumptions, the actual rate of returns on plan assets, the level of market interest rates, legislative changes, and the
amount of voluntary contributions to the plan. Any contributions for the following fiscal year and later will depend on the value of the plan assets in the future and
thus are uncertain. As such, we have not included any amounts beyond 1 year in the table above. Refer to “ Note 17. Employee Benefit Plans ” in the Notes to
Consolidated Financial Statements.
(3) Includes interest on our 0.25% Convertible Senior Notes due 2024 through March 2024 as we have the right to redeem the 2024 Notes in whole or in part
at any time on or after March 15, 2024. Refer to “ Note 11. Convertible Senior Notes ” in the Notes to Consolidated Financial Statements.
(4) Refer to “ Note 9. Fair Value Measurements ” in the Notes to Consolidated Financial Statements.
Purchase obligations represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet
operational requirements.
As of June 30, 2018 , asset retirement obligations presented in the preceding table are included in other non-current liabilities on our consolidated balance
sheet. As of June 30, 2018 , our other non-current liabilities also include $6.1 million of unrecognized tax benefit for uncertain tax positions. We are unable to
reliably estimate the timing of future payments related to uncertain tax positions and therefore have excluded them from the preceding table.
In addition to the obligations discussed above, at the time of the closing of the Oclaro acquisition, which is expected in the next fiscal year, we will be required
to pay cash consideration as described further in “Acquisitions” below. We also expect to incur indebtedness in an aggregate principal amount of approximately
$500 million pursuant to a senior secured term loan facility entered into in connection with the closing of the Oclaro acquisition.
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.
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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 March 11, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Oclaro, Inc. (“Oclaro”), Prota Merger Sub, Inc., and
Prota Merger, LLC, pursuant to which we will acquire Oclaro and Oclaro will become a wholly-owned subsidiary of Lumentum. In accordance with the terms of
the Merger Agreement, each issued and outstanding share of Oclaro common stock will be exchanged for $5.60 in cash and 0.0636 of a share of Lumentum
common stock, subject to the conditions and restrictions set forth in the Merger Agreement. The total transaction consideration was approximately $1.8 billion as
of the date of the Merger Agreement. Oclaro stockholders will own approximately 16% of the combined company following the closing. Oclaro’s stockholders
approved the Merger Agreement on July 10, 2018 and we have received approval for the transaction under the Hart-Scott Rodino Act in the United States. We are
in the process of obtaining antitrust approval in China. The Merger Agreement contains certain termination rights for both Lumentum and Oclaro. The Merger
Agreement further provides that upon termination of the Merger Agreement under specified circumstances relating to failure to obtain regulatory approvals,
Lumentum may be required to pay Oclaro a termination fee of $80 million.
As of August 23, 2018, the total transaction consideration was expected to be approximately $1.7 billion, which would be funded by a combination of $700
million in Lumentum common stock, $500 million in new debt, and the remaining amount from the cash balances of the combined company.
In February 2017, we completed the acquisition of a privately held company to enhance our manufacturing and vertical integration capabilities. We acquired
all of the outstanding shares of the company for a total purchase consideration of $8.7 million. In connection with the acquisition, we paid upfront cash
consideration of $5.1 million, incurred liabilities of $2.7 million contingent upon the achievement of certain production targets being achieved within 36 months
following the acquisition date, and retained $0.9 million of the purchase price as security for the seller’s indemnification obligations, which was fully paid to the
seller subsequent to the year ended June 30, 2018 .
Pension Benefits
As a result of acquiring Time-Bandwidth in January 2014, we have a pension plan for our 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 30, 2018 , our pension plan was under funded by $3.5 million
since the projected benefit obligation (“PBO”) exceeded the fair value of the plan assets.
We expect to contribute $0.5 million to the Switzerland plan during fiscal 2019.
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 $1.3 million or $(1.1) million, based
upon data as of June 30, 2018 .
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Financial Condition
Liquidity and Capital Resources
As of June 30, 2018 and July 1, 2017 , our cash and cash equivalents of $ 397.3 million and $272.9 million, respectively, were held predominantly in the
United States. The total amount of cash outside the United States as of June 30, 2018 was $37.8 million , which was primarily held in Cayman Islands, Hong Kong,
British Virgin Islands, Netherlands, Thailand, and Japan. Although the cash currently held in the United States as well as the cash generated in the United States
from future operations is expected to cover our normal operating requirements, a substantial amount of additional cash could be required for other purposes, such
as capital expenditures to support our business and growth, including costs associated with increasing internal manufacturing capabilities, such as our new
Thailand facility, strategic transactions and partnerships, and acquisitions. Our intent is to indefinitely reinvest funds held outside the United States, except for the
funds held in the Cayman Islands and Hong Kong, and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. However, if
in the future, we encounter a significant need for liquidity domestically or at a particular location that we cannot fulfill through borrowings, equity offerings, or
other internal or external sources, or the cost to bring back the money is insignificant from a tax perspective, we may determine that cash repatriations are
necessary or desirable. Repatriation could result in additional material taxes. These factors may cause us to have an overall tax rate higher than other companies or
higher than our tax rates have been in the past. If conditions warrant, we may seek to obtain additional financing through debt or equity sources. To the extent we
issue additional shares, our existing stockholders may be diluted. However, any such financing may not be available on terms favorable to us, or may not be
available at all.
Fiscal 2018
As of June 30, 2018 , our consolidated balance of cash and cash equivalents increased by $ 124.4 million , to $ 397.3 million from $272.9 million as of July
1, 2017. The increase in cash and cash equivalents was mainly due to cash provided by operating activities of $247.5 million during fiscal 2018 offset by purchases
of short-term investments, net of sales of $33.8 million and capital expenditures of $93.2 million .
Cash provided by operating activities was $ 247.5 million for the year ended June 30, 2018 , primarily resulting from $ 248.1 million of net income and $
18.5 million of non-cash items (such as depreciation, stock-based compensation, amortization of intangibles, amortization of discount on the 2024 Notes, net of the
release of the valuation allowance), offset by $ 19.1 million of changes in our operating assets and liabilities. Changes in our operating assets and liabilities related
primarily to an increase in accounts receivable of $30.8 million , offset by an increase in accrued expenses and other current and non-current liabilities of $11.9
million .
Cash used in investing activities of $127.0 million for the year ended June 30, 2018, was primarily attributable to capital expenditures of $93.2 million and
purchases of short-term investments, net of sales of $33.8 million .
Cash provided by financing activities was $ 3.8 million for the year ended June 30, 2018, resulting primarily from the issuance of common stock under the
2015 Employee Stock Purchase Plan of $9.2 million offset by repayment of capital lease obligation of $6.4 million .
Fiscal 2017
As of July 1, 2017, our consolidated balance of cash and cash equivalents increased by $115.8 million, to $272.9 million from $157.1 million as of July 2,
2016. The increase in cash and cash equivalents was mainly due to proceeds from the issuance of the 2024 Notes during fiscal 2017, offset by the purchases of
short-term investments and property, plant and equipment.
Cash provided by operating activities was $ 85.0 million for the year ended July 1, 2017, primarily resulting from $102.5 million of net loss and $199.4
million of non-cash items such as depreciation, stock-based compensation, amortization of intangibles and unrealized loss on derivative liabilities, the impact of
which was offset by changes in excess tax benefit associated with stock-based compensation. In addition, changes in our operating assets and liabilities of $11.9
million related primarily to an increase in inventories of $41.7 million and a decrease in accounts payable of $16.9 million related to non-cash items such as $10.0
million unpaid property, plant and equipment, offset by a decrease in income taxes, net of $42.7 million.
Cash used in investing activities was mainly for capital expenditures and purchases of short-term investments, net of sales of $138.1 million and $282.5
million, respectively, for the year ended July 1, 2017. Changes in investing cash flow in fiscal 2017 also related to the acquisition of a business for $5.1 million.
Cash provided by financing activities was $456.7 million for the year ended July 1, 2017, resulting primarily from proceeds of $442.3 million from the
issuance of the 2024 Notes.
50
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Fiscal 2016
As of July 2, 2016, our consolidated balance of cash and cash equivalents and short-term investments was $157.1 million, an increase of $142.3 million, or
961.5%, as compared to $14.8 million as of June 27, 2015.
Cash provided by operating activities was $86.6 million, primarily resulting from $9.3 million of net income, which included $80.7 million of non-cash items
such as depreciation, stock-based compensation, derivative liability, amortization of intangibles and disposal of property, plant and equipment, offset by changes in
operating assets and liabilities of $3.4 million. Changes in our operating assets and liabilities related primarily to an increase in accounts payable of $28.9 million,
an increase in accounts receivable of $21.8 million, an increase in prepayments, other current and non-currents assets of $12.7 million, an increase in accrued
payroll and related expenses of $9.2 million, a decrease in deferred taxes, net of $1.7 million, a decrease in income taxes payable of $1.7 million, an increase in
inventories of $3.1 million and a decrease in accrued expenses and other current and non-current liabilities of $0.5 million.
Cash used in investing activities included $82.0 million of cash used for capital expenditures, primarily to expand our manufacturing capacity.
Cash provided by financing activities was $136.4 million, resulting primarily from net transfers from Viavi of $134.2 million at the Separation date.
Liquidity and Capital Resources Requirements
We believe that our cash and cash equivalents as of June 30, 2018 , and cash flows from our operating activities will be sufficient to meet our liquidity and
capital spending requirements for at least the next 12 months. However, if market conditions are favorable, we may evaluate alternatives to opportunistically
pursue additional financing.
There are a number of factors that could positively or negatively impact our liquidity position, including:
•
•
•
•
•
•
•
•
•
•
•
•
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 our business and growth;
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, or other strategic transactions or partnerships;
issuance of debt or equity securities, or other financing transactions, including bank debt;
potential funding of pension liabilities either voluntarily or as required by law or regulation; and
settlement of any conversion or redemption of the 2024 Notes in cash.
In March 2018, we entered into the Merger Agreement with Oclaro. Pursuant to the terms of the Merger Agreement, each issued and outstanding share of
Oclaro common stock will be exchanged for $5.60 in cash and 0.0636 of a share of Lumentum common stock, subject to the conditions and restrictions set forth in
the Merger Agreement. In connection with the acquisition of Oclaro, we have entered into a commitment letter with Deutsche Bank, pursuant to which, subject to
the terms and conditions set forth therein, Deutsche Bank has committed to provide a senior secured term loan facility in an aggregate principal amount of $550
million, with a provision for additional senior secured term loans in an aggregate principal amount not to exceed $250 million. As of August 23, 2018, the total
transaction consideration was expected to be approximately $1.7 billion, which would be funded by a combination of $700 million in Lumentum common stock,
$500 million in new debt, and the remaining amount from the cash balances of the combined company.
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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. Due to the impact of changes in foreign currency
exchange rates between the U.S. Dollar and foreign currencies, for the fiscal years ended June 30, 2018 , July 1, 2017 , and July 2, 2016, we recorded unrealized
gain (loss) of $0.3 million , $0.6 million and $(0.9) million, respectively, in the interest and other income (expense), net in the Consolidated Statements of
Operations included in this Annual Report.
Although we sell primarily in U.S. Dollar, we have foreign currency exchange risks related to our operating expenses denominated in currencies other than the
U.S. Dollar, principally the Thai Baht, Taiwan Dollar, Canadian Dollar, Japanese Yen, Swiss Franc, Euro, and Chinese Yuan. The volatility of exchange rates
depends on many factors that we cannot forecast with reliable accuracy. In the event our foreign currency denominated assets, liabilities, sales or expenses
increase, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business.
Equity Price Risk
We are exposed to equity price risk related to the conversion options embedded in our Series A Preferred Stock and the 2024 Notes. Our Series A Preferred
Stock is convertible, at the option of the holder, 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 of $ 24.63 .
In March 2017, we issued the 2024 Notes in a private placement with an aggregate principal amount of $450 million. We carry the 2024 Notes at face value
less amortized discount on the consolidated balance sheet. The 2024 Notes bear interest at a rate of 0.25% per year. Since the 2024 Notes bear interest at fixed
rates, we have no financial statement risk associated with changes in interest rates. However, the potential value of the shares to be distributed to the holders of
2024 Notes changes when the market price of our stock fluctuates. The 2024 Notes will mature on March 15, 2024, unless earlier repurchased by us or converted
pursuant to their terms, at a conversion price of approximately $60.62 per share.
The conversion feature is bifurcated from the Series A Preferred Stock and accounted for separately as a derivative liability. On a quarterly basis, the
derivative liability is marked to market based on the fair values of the conversion feature, with the resulting income or loss recorded as unrealized gain (loss) on a
derivative liability on our consolidated statements of operations. The determination of fair values includes various inputs, including volatility and interest rate
assumptions (see “ Note 12. Derivative Liability ”). However, the change in the fair value of our common stock has the largest impact to the fair value of the
derivative. Based on a hypothetical $ 10.00 per share increase or decrease in the fair value of our common stock, our net income would be reduced or increased by
approximately ($14.5) million or $14.5 million, respectively, for the Series A Preferred Stock derivative.
Interest Rate Fluctuation Ris k
As of June 30, 2018 , we had cash, cash equivalents, and short-term investments of $711.5 million . Cash equivalents and short-term investments are primarily
comprised of highly liquid investment grade fixed income securities. Our investment policy and strategy is focused on the preservation of capital and supporting
our liquidity requirements. We do not enter into investments for trading or speculative purposes. As of June 30, 2018 , the weighted-average duration of our
investment portfolio was less than six months. Our fixed-income portfolio is subject to fluctuations in interest rates, which could affect our results of operations.
Based on our investment portfolio balance as of June 30, 2018 , a hypothetical increase or decrease in interest rates of 1% (100 basis points) would have resulted in
a decrease or an increase in the fair value of our portfolio of approximately $2.5 million, and a hypothetical increase or decrease of 0.5% (50 basis points) would
have resulted in a decrease or an increase in the fair value of our portfolio of approximately $1.2 million.
52
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
53
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Lumentum Holdings Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lumentum Holdings Inc. and subsidiaries (the “Company”) as of June 30, 2018 and July 1,
2017, the related consolidated statements of operations, comprehensive income (loss), cash flows, and redeemable convertible preferred stock, stockholders’ equity
and invested equity for each of the two years in the period ended June 30, 2018, and the related notes and the schedule listed in the Index at Item 15 (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
June 30, 2018 and July 1, 2017, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2018, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal
control over financial reporting as of June 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated August 28, 2018, expressed an unqualified opinion on the Company's internal control
over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements
based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
August 28, 2018
We have served as the Company's auditor since 2017.
54
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Lumentum Holdings Inc.
In our opinion, the consolidated statements of operations, of comprehensive income (loss), of redeemable convertible preferred stock, stockholders’ equity, and
invested equity and of cash flows for the year ended July 2, 2016 present fairly, in all material respects, the results of operations and cash flows of Lumentum
Holdings Inc. and its subsidiaries for the year ended July 2, 2016, in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule for the year ended July 2, 2016, appearing under Item 15(2), presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated 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 audit. We conducted our audit of these financial 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 audit
provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
September 2, 2016
55
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LUMENTUM HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Years Ended
June 30, 2018
July 1, 2017
July 2, 2016
$
1,247.7 $
1,001.6 $
Net revenue
Cost of sales
Amortization of acquired developed technologies
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Restructuring and related charges
Total operating expenses
Income from operations
Unrealized loss on derivative liabilities
Interest and other income (expense), net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Items reconciling net income (loss) to net income (loss) attributable to common stockholders:
Cumulative dividends on Series A Preferred Stock
Accretion of Series A Preferred Stock
Earnings allocated to Series A Preferred Stock
Net income (loss) attributable to common stockholders - Basic
Net income (loss) attributable to common stockholders - Diluted
Net income (loss) per share attributable to common stockholders:
Basic
Diluted
Shares used to compute net income (loss) per share attributable to common stockholders:
Basic
Diluted
$
$
$
$
See accompanying notes to consolidated financial statements.
56
812.4
3.2
432.1
156.8
128.2
7.2
292.2
139.9
(0.8)
(9.7)
129.4
(118.7)
248.1
(0.9)
—
(5.7)
677.0
6.5
318.1
148.3
110.2
12.0
270.5
47.6
(104.2)
(3.2)
(59.8)
42.7
(102.5)
(0.9)
—
—
241.5 $
(103.4) $
903.0
618.9
6.8
277.3
141.1
117.3
7.4
265.8
11.5
(0.6)
(1.2)
9.7
0.4
9.3
(0.8)
(11.7)
—
(3.2)
241.5 $
(103.4) $
(3.2)
3.88 $
3.82 $
62.3
63.3
(1.71) $
(1.71) $
60.6
60.6
(0.05)
(0.05)
59.1
59.1
Table of Contents
LUMENTUM HOLDINGS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Net income (loss)
Other comprehensive income (loss), net of tax:
Net change in cumulative translation adjustment
Net change in unrealized loss on available-for-sale securities
Net change in defined benefit obligation
Other comprehensive income (loss), net of tax
Comprehensive income (loss), net of tax
Years Ended
June 30, 2018
July 1, 2017
July 2, 2016
$
$
248.1 $
(102.5) $
(0.2)
(1.6)
0.8
(1.0)
(1.2)
—
(0.8)
(2.0)
247.1 $
(104.5) $
9.3
(2.0)
—
(1.1)
(3.1)
6.2
See accompanying notes to consolidated financial statements.
57
LUMENTUM HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
Table of Contents
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
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, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’
EQUITY
Current liabilities:
Accounts payable
Accrued payroll and related expenses
Accrued expenses
Other current liabilities
Total current liabilities
Convertible notes
Derivative liability
Other non-current liabilities
Total liabilities
Commitments and contingencies (Note 18)
Redeemable convertible preferred stock:
Non-controlling interest redeemable convertible Series A Preferred Stock, $0.001 par value, 10,000,000
authorized shares; 35,805 shares issued and outstanding as of June 30, 2018 and July 1, 2017
Total redeemable convertible preferred stock
Stockholders’ equity:
Common stock, $0.001 par value, 990,000,000 authorized shares, 62,790,087 and 61,476,103 shares issued and
outstanding as of June 30, 2018 and July 1, 2017, respectively
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income
Total stockholders’ equity
June 30, 2018
July 1, 2017
$
397.3 $
314.2
197.1
153.6
65.0
1,127.2
306.9
18.3
125.6
3.5
272.9
282.4
166.3
145.2
63.5
930.3
273.5
21.5
3.9
3.7
$
$
1,581.5 $
1,232.9
126.5 $
31.5
33.9
22.1
214.0
334.2
52.4
19.0
619.6
35.8
35.8
0.1
753.2
166.4
6.4
926.1
114.8
27.5
19.3
22.6
184.2
317.5
51.6
25.0
578.3
35.8
35.8
0.1
694.5
(83.2)
7.4
618.8
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity
$
1,581.5 $
1,232.9
See accompanying notes to consolidated financial statements.
58
Table of Contents
LUMENTUM HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended
June 30, 2018
July 1, 2017
July 2, 2016
OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
$
248.1 $
(102.5) $
Depreciation expense
Stock-based compensation
Unrealized loss on derivative liabilities
Amortization of acquired developed technologies and other intangibles
Loss on disposal of property, plant and equipment
Excess tax benefit associated with stock-based compensation
Amortization of discount on 0.25% Convertible Senior Notes due 2024
Release of valuation allowance, net
Other non-cash (income) expenses
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepayments and other current and non-currents assets
Income taxes, net
Accounts payable
Accrued payroll and related expenses
Accrued expenses and other current and non-current liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Payments for acquisition of property, plant and equipment
Acquisition of business, net of cash acquired
Purchases of short-term investments
Proceeds from maturities and sales of short-term investments
Net cash used in investing activities
FINANCING ACTIVITIES:
Net transfers from Viavi
Proceeds from the issuance of 0.25% Convertible Senior Notes due 2024, net of issuance costs
Excess tax benefit associated with stock-based compensation
Payment of dividends - Series A Preferred Stock
Payment of financing obligation related to acquisition
Proceeds from employee stock plans
Repayment of capital lease obligation
Proceeds from the exercise of stock options
Net cash provided by financing activities
Effect of exchange rates on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid for taxes
Cash paid for interest
Unpaid property, plant and equipment in accounts payable and accrued expenses
74.0
46.8
0.8
3.2
0.6
—
16.7
(124.0)
0.4
(30.8)
(7.7)
6.1
(7.3)
4.8
3.9
11.9
247.5
(93.2)
—
(634.3)
600.5
(127.0)
—
—
—
(0.7)
—
9.2
(6.4)
1.7
3.8
0.1
124.4
272.9
54.2
32.7
104.2
6.8
0.2
(3.8)
5.1
—
—
4.2
(41.7)
(7.4)
42.7
(16.9)
1.0
6.2
85.0
(138.1)
(5.1)
(290.7)
8.2
(425.7)
—
442.3
3.8
(0.9)
—
8.1
—
3.4
456.7
(0.2)
115.8
157.1
$
$
397.3 $
272.9 $
12.7 $
1.3
17.2
9.5 $
—
18.4
9.3
47.4
24.9
0.6
7.2
0.6
—
—
—
—
(21.8)
(3.1)
(12.7)
(3.4)
28.9
9.2
(0.5)
86.6
(82.0)
—
—
—
(82.0)
134.2
—
—
(0.5)
(2.3)
3.1
—
1.9
136.4
1.6
142.6
14.5
157.1
2.7
—
13.1
Equipment acquired under capital lease
Accretion of Series A Preferred Stock
15.6
—
—
—
—
11.7
See accompanying notes to consolidated financial statements.
59
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LUMENTUM HOLDINGS INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK, STOCKHOLDERS' EQUITY, AND INVESTED
EQUITY
(in millions)
Non-Controlling Interest
Redeemable Convertible
Series A Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
(in millions)
Additional
Paid-In
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income/(Loss)
12.5
Total Invested
Equity /
Total
Stockholders’
Equity
Viavi Net
Investment
$
368.1 $
380.6
Balance as of June 27, 2015
— $
—
— $
— $
— $
— $
Pre-Separation activity:
Net income (loss)
Other comprehensive income
(loss)
Transfers from Viavi
Total pre-Separation activity
Post-Separation activity:
Issuance of common stock and
reclassification of parent
company investment in
connection with the Separation
Issuance of redeemable
convertible preferred stock, net
of issuance costs of $2.0
Accretion of equity issuance
costs
Recognition of the bifurcation
of the preferred stock’s
derivative liability component
Recognition of the redemption
value of the convertible
preferred stock
Declared dividend for preferred
stock
Other comprehensive income
(loss)
Release of common stock
shares upon vesting of restricted
stock units
Shares withheld for the
withholding on vesting of
restricted stock units
Exercise of stock options
ESPP shares issued
Stock-based compensation
Net income (loss)
Total post-Separation
activity
Balance as of July 2, 2016
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(11.7)
(11.7)
(4.7)
—
—
136.5
(4.7)
124.8
(4.7)
136.5
120.1
—
—
58.8
0.1
457.0
—
—
(457.1)
—
—
33.8
—
—
—
—
—
(35.8)
(35.8)
—
2.0
—
—
(2.0)
—
—
—
(2.0)
—
(9.7)
—
—
—
—
—
—
—
—
9.7
—
—
(9.7)
—
—
—
—
—
—
—
—
—
—
—
—
—
(0.8)
—
—
—
1.6
—
1.6
(9.7)
(0.8)
—
—
0.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(0.3)
0.1
0.2
—
—
35.8
35.8
59.6
59.6
—
—
—
—
—
0.1
0.1
(6.8)
1.9
3.1
24.2
—
467.7
467.7
—
—
—
—
21.0
20.2
20.2
—
—
—
—
—
—
—
—
—
—
(6.8)
1.9
3.1
24.2
21.0
1.6
9.4
(492.9)
—
(3.3)
497.4
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LUMENTUM HOLDINGS INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK, STOCKHOLDERS' EQUITY, AND INVESTED
EQUITY
(in millions)
(in millions)
Non-Controlling Interest
Redeemable Convertible
Series A Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income/(Loss)
Viavi Net
Investment
Total Invested
Equity /
Total
Stockholders’
Equity
Net income (loss)
—
—
—
—
—
(102.5)
—
—
(102.5)
Other comprehensive income
(loss)
Declared dividend for preferred
stock
Reclassification of 2024 Notes
derivative liability in connection
with cash settlement condition
Issuance of shares pursuant to
equity plans, net of tax
withholdings
ESPP shares issued
Stock-based compensation
Excess tax benefit associated
with stock-based compensation
Balance as of July 1, 2017
Net income (loss)
Other comprehensive income
(loss)
Declared dividend for preferred
stock
Issuance of shares pursuant to
equity plans, net of tax
withholdings
ESPP shares issued
Stock-based compensation
Cumulative effect of stock
compensation accounting
change (Note 2)
—
—
—
—
—
—
(2.0)
—
—
—
—
—
(0.9)
—
—
—
(2.0)
(0.9)
—
—
—
—
192.8
—
—
—
192.8
—
—
—
—
—
—
—
—
—
1.6
0.3
—
—
—
35.8
61.5
—
—
—
—
—
—
0.1
—
(12.2)
8.1
34.3
3.8
694.5
—
—
—
—
—
(83.2)
248.1
—
—
—
—
7.4
—
—
—
—
—
—
—
(1.0)
—
—
—
—
—
(0.9)
—
—
—
—
—
—
—
1.1
0.2
—
—
—
—
1.7
9.2
47.6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(12.2)
8.1
34.3
3.8
618.8
248.1
(1.0)
(0.9)
1.7
9.2
47.6
—
—
—
—
0.2
2.4
—
—
2.6
Balance as of June 30, 2018
— $
35.8
62.8 $
0.1 $
753.2 $
166.4
$
6.4
$
— $
926.1
See accompanying notes to consolidated financial statements.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Lumentum (we, us, our or the Company) is an industry-leading provider of optical and photonic products defined by revenue and market share addressing a
range of end market applications including OpComms and Lasers for manufacturing, inspection and life-science applications. We seek to use our core optical and
photonic technology and our volume manufacturing capability to expand into attractive emerging markets that benefit from advantages that optical or photonics-
based solutions provide, including 3D sensing for consumer electronics and diode light sources for a variety of consumer and industrial applications. The majority
of our customers tend to be OEMs that incorporate our products into their products which then address end-market applications. For example, we sell fiber optic
components that Network Equipment Manufacturers (“NEMs”) customers assemble into communications networking systems, which they sell to network service
providers or enterprises with their own networks. Similarly, many of our customers for our Lasers products incorporate our products into tools they produce, which
are used for manufacturing processes by their customers. For 3D sensing, we sell diode lasers to manufacturers of consumer electronics products for mobile,
personal computing, and gaming who then integrate our devices within their products, for eventual resale to consumers and also into other industrial applications.
Basis of Presentation
On July 31, 2015, prior to the Separation, Viavi transferred substantially all of the assets and liabilities and operations of the CCOP segment and WaveReady
product lines to Lumentum. Financial statements for periods prior to the Separation were prepared on a stand-alone basis and were derived from Viavi’s
consolidated financial statements and accounting records. The Company prepared consolidated financial statements for the period from June 28, 2015 to August 1,
2015 where 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, us. From August 1, 2015 to July 2, 2016, the Company prepared consolidated financial statements as an independent stand-alone basis pursuant to the
rules and regulations of the SEC and are in conformity with U.S. GAAP. In the opinion of management, these consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the consolidated financial statements for the periods
shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future periods.
On August 1, 2015, Lumentum became an independent publicly-traded company through the distribution by JDS Uniphase (“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 on 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 former 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 SEC 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.
See “ Note 3. Related Party Transactions ” in the Notes to Consolidated Financial Statements regarding the relationships we had with Viavi.
The preparation of the consolidated financial statements in accordance with GAAP in the United States requires management to make estimates and
assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical
experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and
actions that may impact the Company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our
financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are inventory valuation, revenue
recognition, accounting for income taxes, long-lived asset valuation, warranty, valuation of derivative liability, business combinations, and valuation of goodwill.
On March 11, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Oclaro, Prota Merger Sub, Inc., and Prota Merger,
LLC, pursuant to which we will acquire Oclaro and Oclaro will become a wholly-owned subsidiary of Lumentum. In accordance with the terms of the Merger
Agreement, each issued and outstanding share of Oclaro common stock will be exchanged for $5.60 in cash and 0.0636 of a share of Lumentum common stock,
subject to the conditions and restrictions set forth in the Merger Agreement. The total transaction consideration was approximately $1.8 billion as of the date of the
Merger Agreement. Oclaro stockholders will own approximately 16% of the combined company following the closing. Oclaro’s stockholders approved the Merger
Agreement on July 10, 2018 and we have received approval for the transaction under the Hart-Scott Rodino Act in the United States. We are in the process of
obtaining antitrust approval in China. The Merger Agreement
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
contains certain termination rights for both Lumentum and Oclaro. The Merger Agreement further provides that upon termination of the Merger Agreement under
specified circumstances relating to failure to obtain regulatory approvals, Lumentum may be required to pay Oclaro a termination fee of $80 million .
As of August 23, 2018, the total transaction consideration was expected to be approximately $1.7 billion , which would be funded by a combination of $700
million in Lumentum common stock, $500 million in new debt, and the remaining amount from the cash balances of the combined company.
In connection with the Merger Agreement, Lumentum entered into a commitment letter, dated as of March 11, 2018, with Deutsche Bank Securities Inc. and
Deutsche Bank AG New York, New York Branch (“Deutsche Bank”), pursuant to which, subject to the terms and conditions set forth therein, Deutsche Bank has
committed to provide a senior secured term loan facility in an aggregate principal amount of up to $550 million , with a provision for additional senior secured
term loans in an aggregate principal amount not to exceed $250 million .
The transaction is subject to customary closing conditions, including antitrust regulatory approval in China. The transaction is not subject to any financing
condition. The transaction is expected to be completed in the second half of calendar 2018.
Fiscal Years
We utilize a 52-53 week fiscal year ending on the Saturday closest to June 30th. Our fiscal 2018 ended on June 30, 2018 and was a 52-week year. Our fiscal
2017 ended on July 1, 2017 and was a 53-week year. Our fiscal 2016 ended on July 2, 2016 and was a 52-week year.
Principles of Consolidation
These audited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
All inter-company transactions and balances have been eliminated in consolidation. All material transactions between us and other businesses of Viavi prior
to Separation were reflected as net transfers to and from Viavi as a component of financing activities in the consolidated statements of cash flows.
Certain prior period amounts have been reclassified to conform to the current year presentation on the notes to consolidated financial statements. The
reclassification of the prior period amounts did not impact previously reported consolidated financial statements.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
We consider highly-liquid fixed income securities with original maturities of three months or less at the time of purchase to be cash equivalents. As of fiscal
year ended June 30, 2018 , cash and cash equivalents mainly consist of commercial papers, U.S. Treasury securities, and U.S. Agency securities. As of fiscal year
ended July 1, 2017 , our cash and cash equivalents did not include any investments with original maturities of three months or less.
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Short-term Investments
LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We classify our investments in debt as available-for-sale and record these investments at fair value. Investments with an original maturity of three months or
less at the date of purchase are considered cash equivalents, while all other investments are classified as short-term based on management’s intent and ability to use
the funds in current operations. Unrealized gains and losses are reported as a component of other comprehensive loss. Realized gains and losses are determined
based on the specific identification method, and are reflected as interest and other income (expense), net in our Consolidated Statements of Operations. We
regularly review our investment portfolio to identify and evaluate investments that have indicators of possible impairment. Factors considered in determining
whether a loss is other-than-temporary include, but are not limited to: the length of time and extent a security’s fair value has been below its cost, the financial
condition and near-term prospects of the investee, the credit quality of the security’s issuer, likelihood of recovery and our intent and ability to hold the security for
a period of time sufficient to allow for any anticipated recovery in value. For our debt instruments, we also evaluate whether we have the intent to sell the security
or it is more likely than not that we will be required to sell the security before recovery of its cost basis.
Impairment of Marketable and Non-Marketable Securities
We periodically review our marketable and non-marketable securities for impairment. If we conclude that any of these investments are impaired, we
determine whether such impairment is other-than-temporary. We consider factors such as the duration, severity and the reason for the decline in value, the potential
recovery period and whether we intend to sell. For marketable debt securities, we also consider whether (i) it is more likely than not that we will be required to sell
the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses. If any impairment
is considered other-than-temporary, we will write-down the security to its fair value.
Fair Value of Financial Instruments
We define fair value as the price that would be received from selling an asset, or paid to transfer a liability, in an orderly transaction between market
participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we
consider the principal or most advantageous market in which to transact and the market-based risk. We apply fair value accounting for all financial assets and
liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The carrying amounts reported in the consolidated financial
statements approximate the fair value for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities due to their short-term nature.
Basic and Diluted Net Income (Loss) per Common Share
Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common
shares outstanding during the reporting period. The weighted average number of shares is calculated by taking the number of shares outstanding and weighting
them by the amount of time that they were outstanding. Diluted earnings per share reflects the potential dilution that could occur if stock options, preferred stock,
and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of
the Company.
Diluted loss per share is the same as basic loss per share during periods where net losses are incurred since the inclusion of the potential common stock
equivalents would be anti-dilutive as a result of the net loss.
Our Series A Preferred Stock is considered a participating security, which may participate in undistributed earnings with our common stock. The holders of
our Preferred Stock would be entitled to share in dividends, on an as-converted basis, if the holders of our common stock were to receive dividends. We are
required to use the two-class method when computing earnings per share as we have a security that qualifies as a participating security. The two-class method is an
earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. In determining the amount of net earnings to allocate to common stockholders, earnings are
allocated to both common and participating securities based on their respective weighted-average shares outstanding during the period. Diluted earnings per
common share, when applicable, is computed using the more dilutive of the two-class method or the if-converted method. In periods of net loss, no effect is given
to participating securities since they do not contractually participate in the losses of the Company.
In March 2017, we issued $450 million in aggregate principal amount of 0.25% Convertible Senior Notes due in 2024 (the “2024 Notes”). We have the
ability and intent to settle the $450 million face value of the 2024 Notes in cash. Therefore, we use the treasury stock method for calculating the dilutive impact of
the 2024 Notes. The 2024 Notes will have no impact to diluted
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
earnings per share until the average price of our common stock exceeds the conversion price of $60.62 . Refer to “ Note 11. Convertible Senior Notes ” for details.
The dilutive effect of securities from the 2015 Equity Incentive Plan is reflected in diluted earnings per share by application of the treasury stock method,
which includes consideration of unamortized share-based compensation expense and the dilutive effect of in-the-money options and non-vested restricted stock
units. Under the treasury stock method, the amount the employee must pay for exercising stock options and the amount of unamortized share-based compensation
expense are collectively assumed to be used to repurchase hypothetical shares. An increase in the fair value of our common stock can result in a greater dilutive
effect from potentially dilutive awards.
Anti-dilutive potential shares from 2015 Equity Incentive Plan are excluded from the calculation of diluted earnings per share if their exercise price exceeded
the average market price during the period or the share-based awards were determined to be anti-dilutive based on applying the treasury stock method.
In periods when we have a net loss, all potentially dilutive securities are excluded from our calculation of earnings per share as their inclusion would have
been anti-dilutive.
Inventory Valuation
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
value of our inventory on a quarterly basis and write down those inventories which are obsolete or in excess of our forecasted usage to the lower of their cost or
estimated net realizable value. Our estimates of realizable value are based upon our analysis and assumptions including, but not limited to, forecasted sales levels
and historical usage 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 minimize
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.
Revenue Recognition
During the periods presented, we recognized 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.
We record as a reduction to revenues reserves for sales returns based upon historical experience rates and for any specific known customer amounts. We also
provide certain distributors and OEMs with volume-pricing discounts, such as rebates and incentives, which are recorded as a reduction to revenues at the time of
sale. Historically these volume discounts have not been significant. For revenue recognition changes related to implementation of ASU 2014-09, refer to “Note 2.
Recent Accounting Pronouncements”.
Income Taxes
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 consolidated 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. We consider future growth, forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law, and
prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to
realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period
in which we make such a determination, or goodwill would be adjusted at our final determination of the
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
valuation allowance related to an acquisition within the measurement period. If we later determine that it is more likely than not that the net deferred tax assets
would be realized, we would reverse the applicable portion of the previously provided valuation allowance as an adjustment to earnings at such time.
We are subject to income tax audits by the respective tax authorities of the jurisdictions in which we operate. The determination of our income tax liabilities
in each of these jurisdictions requires the interpretation and application of complex, and sometimes uncertain, tax laws and regulations. The authoritative guidance
on accounting for income taxes prescribes both recognition and measurement criteria that must be met for the benefit of a tax position to be recognized in the
financial statements. If a tax position taken, or expected to be taken, in a tax return does not meet such recognition or measurement criteria, an unrecognized tax
benefit liability is recorded. If we ultimately determine that an unrecognized tax benefit liability is no longer necessary, we reverse the liability and recognize a tax
benefit in the period in which it is determined that the unrecognized tax benefit 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.
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 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.
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 estimate the fair value of a reporting unit using market approach, income approach or a combination of market and income approach.
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. Significant estimates in
the income approach include: future cash flows, discount rates.
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.
Based on the impairment analysis performed in the fourth quarter of each year presented, the fair value of our reporting unit substantially exceeded the
carrying value; as such, our annual qualitative assessment did not indicate that a more detailed quantitative analysis was necessary.
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Intangible Assets
LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible assets consist primarily of intangible assets purchased 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
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 plan 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 an 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 consolidated 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 consolidated 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 consolidated 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 10% 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 and trade receivables.
We perform credit evaluations of our customers’ financial condition and generally do not require collateral from our customers. 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.
Although the Company deposits its cash with financial institutions that management believes are of high credit quality, its deposits, at times, may exceed
federally insured limits. The Company’s investment portfolio consists of investment grade securities diversified amongst security types, industries, and issuers. The
Company’s investment policy limits the amount of credit exposure
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in the investment portfolio to a maximum of 5% to any one issuer, except for Treasury and Government Agencies securities, and the Company believes no
significant concentration risk exists with respect to these investments.
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 2018 , 2017 and 2016 , several customers generated more than 10% of total net revenue. Refer to “ Note 19. Operating Segments and
Geographic Information ” in the Notes to Consolidated Financial Statements.
As of June 30, 2018 , two customers represented greater than 10% of total accounts receivable, net. As of July 1, 2017 , one customer represented greater
than 10% of 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 consolidated statements of redeemable convertible preferred stock, stockholders’ equity, and invested equity.
Income and expense accounts are translated at the average exchange rates during the year. Gains and losses from re-measurement of monetary assets and liabilities
denominated in currencies other than the respective functional currencies are included in the consolidated 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 were previously allocated to
us by Viavi, are reported in interest and other income (expense), net and were $0.3 million , $0.6 million and $(0.9) million during fiscal 2018 , 2017 and 2016 ,
respectively. There were no allocations of expenses from Viavi for the fiscal 2018 and 2017. Refer to “ Note 3. Related Party Transactions ” in the Notes to
Consolidated Financial Statements for allocations from Viavi during fiscal 2016.
Stock-based Compensation
Compensation expense related to stock-based transactions is measured and recognized in the financial statements based on fair value at the grant date.
Restricted stock units (“RSUs”) are grants of shares of our common stock, the vesting of which is based on the requisite service requirement. Generally, our
RSUs are subject to forfeiture and expected to vest over one to four years. For new-hire grants, RSUs generally vest ratably on an annual basis over four years. For
annual refresh grants, RSUs generally vest ratably on an annual, or combination of annual and quarterly, basis over three years.
Restricted stock awards (“RSAs”) are grants of shares of our common stock that are subject to various restrictions, including restrictions on transferability
and forfeiture provisions. RSAs are expected to vest over one to four years, and the shares acquired may not be transferred by the holder until the vesting
conditions (if any) are satisfied.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Performance stock units (“PSUs”) are grants of shares of our common stock that vest upon the achievement of certain performance and service conditions.
We account for the fair value of PSUs using the closing market price of our common stock on the date of grant. We begin recognizing compensation expense when
we conclude that it is probable that the performance conditions will be achieved. We reassess the probability of vesting at each reporting period and adjust our
compensation cost based on this probability assessment. Our PSUs are subject to risk of forfeiture until performance and service conditions are satisfied and
generally vest over three years.
We estimate the fair value of the rights to acquire stock under our 2015 Employee Stock Purchase Plan (the “2015 Purchase Plan”) using the Black-Scholes
option pricing formula. Our 2015 Purchase Plan provides for consecutive six-month offering periods. We recognize such compensation expense on a straight-line
basis over the requisite service period. We calculate the volatility factor based on our historical stock prices.
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. Refer to “ Note 14. Restructuring and Related Charges ” in the Notes to Consolidated Financial Statements.
Derivative Liability
The Series A Preferred Stock issued by our subsidiary Lumentum Inc. is redeemable at the option of the holder after five years and classified as non-
controlling interest redeemable convertible preferred stock in our consolidated balance sheet and is measured at its redemption value. The Series A Preferred Stock
conversion feature is bifurcated from the Series A Preferred Stock and accounted for separately as a derivative liability. In March 2017, we issued $450.0 million
in aggregate principal amount of 2024 Notes, which are due in March 2024 unless earlier repurchased by us or converted pursuant to their terms. Prior to the Tax
Matters Agreement settlement condition (“TMA settlement condition”), because we could only settle the 2024 Notes in cash, we determined that the conversion
feature met the definition of a derivative liability. We separated the derivative liability from the host debt instrument based on the fair value of the derivative
liability. On June 29, 2017, we met the requirements to account for the conversion option of the 2024 Notes as equity and the conversion option is no longer
marked to market. On a quarterly basis, the derivative liability for the Series A Preferred Stock is marked to market based on the fair value of the conversion
feature, with the resulting income or loss recorded as unrealized loss on the derivative liabilities on our consolidated statements of operations. The determination of
fair value includes various inputs, including volatility and interest rate assumptions. However, the change in the fair value of our common stock has the largest
impact to the fair value of the derivatives. During fiscal 2018, 2017, and 2016, we recognized unrealized loss on derivative liabilities of $0.8 million , $104.2
million , and $0.6 million , respectively.
Business Combinations
In accordance with the guidance for business combinations, we determine whether a transaction or other event is a business combination, which requires that
the assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method. If the assets
acquired are not a business, we account for the transaction or other event as an asset acquisition. Under both methods, we recognize the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquired entity. We capitalize acquisition-related costs and fees associated with asset acquisitions and
immediately expense acquisition-related costs and fees associated with business combinations.
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated
fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When
determining the fair values of assets acquired and liabilities assumed, we make significant estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer relationships and acquired
developed technology and discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable and, as a result, actual results may differ materially from estimates. Other estimates associated with the accounting for acquisitions may change as
additional information becomes available regarding the assets acquired and liabilities assumed. Any change in facts and circumstances that existed as of the
acquisition date and impacts our preliminary
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
estimates is recorded to goodwill if identified within the measurement period. Subsequent to the measurement period or our final determination of fair value of
assets and liabilities whichever is earlier the adjustments will affect our earnings.
In addition, we estimate the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our
estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.
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 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 shipping and handling costs related to revenue transactions within cost of sales as a period cost 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.
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.
Note 2. Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
Effective July 2, 2017, we adopted Accounting Standards Update (“ASU”) 2016-09, Stock Compensation ASU 718 - Improvements to Employee Share-Based
Payment Accounting . As a result of the adoption, in the first quarter of fiscal year 2018, we recorded on a modified retrospective basis a $2.6 million cumulative-
effect adjustment to retained earnings for the recognition of excess tax benefits generated by the settlement of share-based awards in prior periods. We elected to
account for forfeitures of equity awards when they occur. The change was applied on a modified retrospective basis with a cumulative-effect adjustment of
approximately $0.2 million to retained earnings in the fiscal first quarter of 2018.
All excess tax benefits and deficiencies are recognized in the income tax provision in the consolidated statements of operations prospectively, rather than in
additional paid-in-capital in the consolidated balance sheets. In addition, the standard eliminates the requirement to defer recognition of excess tax benefits until
they are realized through a reduction to income taxes payable. We present excess tax benefits as an operating activity in the consolidated statements of cash flows
on a prospective basis.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounting Pronouncements Not Yet Effective
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-01, Business Combinations (Topic 805) , which clarifies the
definition of a business. For accounting and financial reporting purposes, businesses are generally comprised of three elements; inputs, processes, and outputs.
Integrated sets of assets and activities capable of providing these three elements may not always be considered a business, and the lack of one of the three elements
does not always disqualify the set from being a business. The issuance of ASU 2017-01 provides a clarifying screen to determine when a set of assets and activities
is not a business. Primarily, the screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset
or group of similar identifiable assets, the set is not a business. The amendments contained in ASU 2017-01 are effective for annual periods beginning after
December 15, 2017, including interim periods within those periods. The accounting standard update will be effective for us beginning in the first quarter of fiscal
2019 and should be applied prospectively. The implementation of ASU 2017-01 will not have a material impact on our consolidated financial statements.
In January 2017, FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment . ASU
2017-04 removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment charge will be the
amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The amendments contained in ASU 2017-
04 are effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted, which should be applied prospectively. We plan
to adopt the accounting standard update in our first quarter of fiscal 2020. We do not believe the implementation of ASU 2017-04 will have a material impact on
our consolidated financial statements.
In October 2016, FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets other than Inventory . The new guidance
removes the prohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than
inventory. The new guidance will be effective for us in our first quarter of fiscal 2019. We do not believe that the adoption of ASU 2016-16 will have a material
impact on our financial statements.
In August 2016, FASB issued ASU 2016-15, S tatement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , which
clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The amendments contained in ASU 2016-15
are effective for interim and annual periods beginning after December 15, 2017. The accounting standard update will be effective for us in the first quarter of fiscal
2019 and will be applied prospectively. If we elect to settle the principal amounts of our 2024 Notes (refer to “ Note 11. Convertible Senior Notes ”) in cash, the
payment will be bifurcated between (i) cash outflows for operating activities of $137.6 million for the portion related to accreted interest attributable to debt
discount, and (ii) financing activities for the remainder of $312.4 million .
In February 2016, FASB issued ASU 2016-02, Leases. The new guidance generally requires an entity to recognize on its balance sheet operating and
financing lease liabilities and corresponding right-of-use assets. The new guidance contained in ASU 2016-02 is effective for annual periods beginning after
December 15, 2018, including interim periods within those periods, with early adoption permitted. The standard is effective for us in our first quarter of fiscal 2020
where we will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a
modified retrospective approach, with an option to elect certain practical expedients. Based on our current lease portfolio, we estimate the value of leased assets
and liabilities that may be recognized will be material. We are continuing to evaluate the impact of ASU 2016-02 which is subject to change.
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which outlines a single, comprehensive model for
entities to use in accounting for revenue arising from contracts with customers. The core principle of ASU 2014-09 is to recognize revenue when promised goods
or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09
defines a five-step process to achieve this core principle and, accordingly, we expect more judgment and estimates may be required within the revenue recognition
process than is required under the previous revenue recognition standard, including identifying performance obligations in the contract, estimating the amount of
variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for
us beginning on July 1, 2018. ASU 2014-09 permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective
method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective
method). We elected to adopt ASU 2014-09 using the modified retrospective method and will apply the standard to contracts that are not completed as of July 1,
2018.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We have completed our analysis of open revenue contracts as of July 1, 2018. Based on our assessment, the impact on revenue in our consolidated financial
statements or disclosures is not material because under ASU 2014-09 we continue to recognize most revenue at the point-in-time when control transfers.
In the preparation for the adoption of ASU 2014-09, we have implemented internal controls to enable the preparation of financial information and related
disclosures in accordance with this standard.
Note 3. Related Party Transactions
Transactions with Viavi
Since October 2017, all transactions with Viavi were no longer related party transactions, as Viavi held less than 5% of our total shares outstanding.
During the fiscal year ended July 1, 2017, we recognized revenue of $3.6 million from products sold to Viavi. During the fiscal year ended July 1, 2017, we
recorded $0.5 million in research and development cost reimbursement and $0.7 million in sublease rental income. As of July 1, 2017, we had $0.1 million in trade
accounts receivable due from Viavi and $0.5 million in other receivables from Viavi. As of July 1, 2017, we had $0.2 million in trade payables due to Viavi.
During the fiscal year ended July 1, 2017, we recorded $0.6 million in other income, which resulted from a tax indemnification agreement between Lumentum and
Viavi. As a result, we had $0.6 million in other non-current assets due from Viavi as of July 1, 2017.
During the fiscal year ended July 2, 2016, we recognized revenue of $3.3 million from products sold to Viavi. During the fiscal year ended July 2, 2016, we
recorded $2.3 million in research and development cost reimbursement and $0.7 million in sublease rental income. As of July 2, 2016, we had $1.1 million in
accounts receivable due from Viavi.
Allocated Costs
From June 28, 2015 to August 1, 2015, the Separation date, the consolidated statements of operations included our direct expenses for cost of sales, research
and development, 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 were allocated to us using estimates that we consider to be a
reasonable reflection of the utilization of services or benefits received by our business. The allocation methods include revenue, headcount, square footage, actual
consumption and usage of services and others.
There were no allocations of expenses from Viavi for the fiscal years ended June 30, 2018 or July 1, 2017. During the fiscal year ended July 2, 2016, allocated
costs from Viavi included in the accompanying consolidated statements of operations were as follows (in millions):
Selling, general and administrative
Interest and other (income) expenses, net
Interest expense
Total allocated costs
72
July 2, 2016
11.7
(0.1)
0.1
11.7
$
$
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Note 4. Earnings Per Share
LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the computation of basic and diluted net income (loss) attributable to common stockholders per share ( in millions, except per
share data ):
Basic Earnings per Common Share
Net income (loss)
Less: Cumulative dividends on Series A Preferred Stock
Less: Earnings allocated to Series A Preferred Stock
Less: Accretion of Series A Preferred Stock
Net income (loss) attributable to common stockholders - Basic
Weighted average common shares outstanding including Series A Preferred Stock
Less: Weighted average Series A Preferred Stock
Basic weighted average common shares outstanding
Net income (loss) per share attributable to common stockholders - Basic
Diluted Earnings per Common Share
Net income (loss) attributable to common stockholders - Diluted
Weighted average common shares outstanding for basic earnings per common share
Effect of dilutive securities from 2015 Equity Incentive Plan
Effect of diluted securities from Series A Preferred Stock
Diluted weighted average common shares outstanding
Net income (loss) per share attributable to common stockholders - Diluted
Years Ended
June 30, 2018
July 1, 2017
July 2, 2016
$
$
$
$
$
248.1 $
(102.5) $
(0.9)
(5.7)
—
(0.9)
—
—
241.5 $
(103.4) $
63.8
(1.5)
62.3
62.1
(1.5)
60.6
3.88 $
(1.71) $
241.5 $
(103.4) $
62.3
1.0
—
63.3
60.6
—
—
60.6
3.82 $
(1.71) $
9.3
(0.8)
—
(11.7)
(3.2)
60.4
(1.3)
59.1
(0.05)
(3.2)
59.1
—
—
59.1
(0.05)
On August 1, 2015, JDSU distributed 47.1 million shares, or 80.1% of the outstanding shares of the Company’s common stock to existing holders of JDSU
common stock. The weighted average number of common stock outstanding is calculated as the number of shares of common stock outstanding immediately
following the Separation, and the weighted average number of shares outstanding following the Separation through June 30, 2018. Diluted earnings (loss) per share
is calculated by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding
for the period beginning after the Separation.
Our Series A Preferred Stock is considered a participating security, which may participate in undistributed earnings with our common stock. The holders of
our Preferred Stock would be entitled to share in dividends, on an as-converted basis, if the holders of our common stock were to receive dividends. We are
required to use the two-class method when computing earnings per share as we have a security that qualifies as a participating security. The two-class method is an
earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. In determining the amount of net earnings to allocate to common stockholders, earnings are
allocated to both common and participating securities based on their respective weighted-average shares outstanding during the period. Diluted earnings per
common share, when applicable, is computed using the more dilutive of the two-class method or the if-converted method. In periods of net loss, no effect is given
to participating securities since they do not contractually participate in the losses of the Company.
In March 2017, we issued $450 million in aggregate principal amount of 2024 Notes. We have the ability and intent to settle the $450 million face value of
the 2024 Notes in cash. Therefore, we use the treasury stock method for calculating the dilutive impact of the 2024 Notes. The 2024 Notes will have no impact to
diluted earnings per share until the average price of our common stock exceeds the conversion price of $60.62 . Refer to “ Note 11. Convertible Senior Notes ” for
further discussion.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The dilutive effect of securities from the 2015 Equity Incentive Plan is reflected in diluted earnings per share by application of the treasury stock method,
which includes consideration of unamortized share-based compensation expense and the dilutive effect of in-the-money options and non-vested restricted stock
units. Under the treasury stock method, the amount the employee must pay for exercising stock options and the amount of unamortized share-based compensation
expense are collectively assumed to be used to repurchase hypothetical shares. An increase in the fair value of our common stock can result in a greater dilutive
effect from potentially dilutive awards.
Anti-dilutive potential shares from 2015 Equity Incentive Plan are excluded from the calculation of diluted earnings per share if their exercise price exceeded
the average market price during the period or the share-based awards were determined to be anti-dilutive based on applying the treasury stock method.
For the year ended July 2, 2016, 1.2 million weighted average shares related to our 2015 Equity Incentive Plan were excluded from the calculation of diluted
shares because their inclusion would have been anti-dilutive based on applying the treasury stock method. For the years ended June 30, 2018 and July 1, 2017,
based on the treasury stock method, weighted average shares from 2015 Equity Incentive Plan excluded from the calculation of diluted shares were not material.
For the years ended July 1, 2017 and July 2, 2016, 1.0 million and 0.8 million weighted average shares related to our 2015 Equity Incentive Plan,
respectively, were excluded from the calculation of diluted shares due to the net loss reported in these periods.
Note 5. Accumulated Other Comprehensive Income (Loss)
Our accumulated other comprehensive income (loss) consists of the accumulated net unrealized gains or losses on foreign currency translation adjustments,
the defined benefit obligation, and available-for-sale securities.
As of June 30, 2018 and July 1, 2017 , balances for the components of accumulated other comprehensive income (loss) were as follows ( in millions ):
Beginning balance as of June 27, 2015
Other comprehensive income (loss)
Beginning balance as of July 2, 2016
Other comprehensive income (loss)
Beginning balance as of July 1, 2017
Other comprehensive income (loss)
Ending balance as of June 30, 2018
$
$
Foreign currency
translation adjustments,
net of tax
13.7
$
Defined benefit
obligation, net of tax (1)
(1.2)
$
Unrealized gain (loss) on
available-for-sale
securities, net of tax
Total
(2.0)
11.7
(1.2)
10.5
(0.2)
10.3
(1.1)
(2.3)
(0.8)
(3.1)
0.8
$
(2.3)
$
— $
—
—
—
—
(1.6)
(1.6)
$
12.5
(3.1)
9.4
(2.0)
7.4
(1.0)
6.4
(1) Refer to “ Note 17. Employee Benefit Plans ” in the Notes to Consolidated Financial Statements on the computation of net periodic cost for pension
plans.
Note 6. Asset Acquisition
On March 30, 2018, we entered into a Transition Services Agreement (“TSA”) with one of our contract manufacturers to wind down the production of our
products at their facility in China and to facilitate an orderly transition of manufacturing to our manufacturing facility in Thailand, including the purchase of the
manufacturing equipment. Under the terms of the TSA, we are required to pay $5.3 million in cash upon completion of certain milestones related to the purchase of
equipment.
We are also required to share cost of retention and severance, and to reimburse for certain other direct and indirect costs incurred by our contract
manufacturer for transition services provided.
As of June 30, 2018, the assets acquired under this TSA are not material.
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Note 7. Balance Sheet Details
Accounts receivable allowances
LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of June 30, 2018 and July 1, 2017 , our accounts receivable allowance balance was $ 2.6 million and $1.8 million , respectively.
Inventories
The components of inventories were as follows ( in millions ):
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 ):
Capitalized manufacturing overhead
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 (2)
Computer equipment and software
Furniture and fixtures
Leasehold improvements
Construction in progress
Less: Accumulated depreciation
Property, plant and equipment, net
June 30, 2018
July 1, 2017
98.2 $
34.5
20.9
153.6 $
71.7
49.4
24.1
145.2
June 30, 2018
July 1, 2017
20.5 $
19.5
14.0
11.0
65.0 $
30.1
12.3
10.5
10.6
63.5
$
$
$
$
June 30, 2018
July 1, 2017 (1)
$
10.6 $
55.1
463.6
26.3
2.2
25.8
52.6
636.2
(329.3)
$
306.9 $
10.6
37.3
378.4
26.2
3.6
30.5
84.6
571.2
(297.7)
273.5
(1) We have reclassified certain prior period amounts to conform to current period presentation.
(2) In the first quarter of fiscal 2018, we started leasing equipment from a vendor and have accounted for the transaction as a capital lease. Included in the
table above is our capital lease asset of $15.6 million , gross and depreciation expense of $5.2 million as of June 30, 2018 .
During fiscal 2018 , 2017 and 2016 , we recorded depreciation expense of $74.0 million , $54.2 million and $47.4 million , respectively.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our construction in progress primarily includes machinery and equipment that were purchased in order to increase our manufacturing capacity. We expect to
place these assets in service in the next 12 months.
Other current liabilities
The components of other current liabilities were as follows (in millions) :
Warranty accrual (1)
Restructuring accrual and related charges (2)
Deferred revenue and customer deposits
Capital lease obligation (3)
Other current liabilities
Other current liabilities
June 30, 2018
July 1, 2017
6.6 $
1.9
2.8
7.3
3.5
22.1 $
9.7
3.8
6.9
—
2.2
22.6
$
$
(1) Refer to “ Note 18. Commitments and Contingencies ” in the Notes to Consolidated Financial Statements.
(2) Refer to “ Note 14. Restructuring and Related Charges ” in the Notes to Consolidated Financial Statements.
(3) As of June 30, 2018 , an amount of $1.6 million related to a capital lease was recorded in accounts payable on the consolidated balance sheet. Refer to “
Note 18. Commitments and Contingencies ” in the Notes to Consolidated Financial Statements.
Other non-current liabilities
The components of other non-current liabilities were as follows ( in millions ):
Asset retirement obligations
Pension and related accrual
Deferred rent
Unrecognized tax benefit
Capital lease obligation (1)
Other non-current liabilities
Other non-current liabilities
June 30, 2018
July 1, 2017
2.7 $
3.5
2.6
6.1
0.4
3.7
19.0 $
2.5
3.9
3.3
10.5
—
4.8
25.0
$
$
(1) Refer to “ Note 18. Commitments and Contingencies ” in the Notes to Consolidated Financial Statements.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Cash, Cash Equivalents, and Short-term Investments
Cash, cash equivalents and short-term investments
The following table summarizes our cash, cash equivalents, and short-term investments by category for the periods presented ( in millions ):
June 30, 2018
Cash
Cash equivalents:
Certificates of deposit
Commercial paper
Money market funds
U.S. Treasury securities
U.S. Agency securities
Total cash and cash equivalents
Short-term investments:
Certificates of deposit
Commercial paper
Asset-backed securities
Corporate debt securities
Municipal bonds
Mortgage-backed securities
Foreign government bonds
Total short-term investments
July 1, 2017
Cash
Cash equivalents:
Certificates of deposit
Commercial paper
Money market funds
Total cash and cash equivalents
Short-term investments:
Certificates of deposit
Asset-backed securities
Corporate debt securities
Municipal bonds
Foreign government bonds
U.S. Treasury securities
Total short-term investments
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
103.6 $
— $
— $
103.6
3.0
112.1
0.8
143.6
34.2
—
—
—
—
—
—
—
—
—
—
397.3 $
— $
— $
7.5 $
— $
10.5
68.0
220.6
1.6
4.2
3.4
—
—
0.1
—
—
—
— $
—
(0.2)
(1.5)
—
—
—
3.0
112.1
0.8
143.6
34.2
397.3
7.5
10.5
67.8
219.2
1.6
4.2
3.4
315.8 $
0.1 $
(1.7)
$
314.2
201.3 $
— $
— $
201.3
52.1
14.7
4.8
272.9 $
—
—
—
— $
—
—
—
— $
202.1 $
— $
— $
26.1
46.4
4.9
1.0
1.9
—
—
—
—
—
—
—
—
—
—
52.1
14.7
4.8
272.9
202.1
26.1
46.4
4.9
1.0
1.9
282.4 $
— $
— $
282.4
$
$
$
$
$
$
$
We use the specific-identification method to determine any realized gains or losses from the sale of our short-term investments classified as available-for-
sale. During fiscal 2018 and 2017 , we did not realize significant gains or losses on a gross level from the sale of our short-term investments classified as available-
for-sale.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During our fiscal 2018 and 2017, our interest and other income (expense), net of $(9.7) million and $(3.2) million , includes interest income on the short-term
investments and cash equivalents of $8.5 million and $1.1 million , respectively.
The following table summarizes unrealized losses on our cash equivalents and short-term investments by category and length of time the investment has
been in a continuous unrealized loss position as of the periods presented (in millions) :
June 30, 2018
Certificates of deposit
Commercial paper
Asset-backed securities
Corporate debt securities
Municipal bonds
U.S. Agency securities
Foreign government bonds
Total
July 1, 2017
Asset-backed securities
Corporate debt securities
Municipal bonds
Foreign government bonds
U.S. Treasury securities
Total
Less than 12 Months
12 Months or Greater
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Total
Unrealized Losses
$
5.4 $
8.5
66.6
188.6
0.6
4.0
3.4
— $
—
(0.2)
(1.5)
—
—
—
— $
— $
5.4 $
—
0.3
2.0
—
—
—
—
—
—
—
—
—
8.5
66.9
190.6
0.6
4.0
3.4
—
—
(0.2)
(1.5)
—
—
—
$
$
$
277.1 $
(1.7)
$
2.3 $
— $
279.4 $
(1.7)
21.5 $
29.8
2.9
1.0
1.9
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
21.5 $
29.8
2.9
1.0
1.9
57.1 $
— $
— $
— $
57.1 $
—
—
—
—
—
—
The following table classifies our short-term investments by contractual maturities ( in millions ):
Due in 1 year
Due in 1 year through 5 years
Due in 5 years through 10 years
Due after 10 years
June 30, 2018
July 1, 2017
Amortized Cost
$
150.1 $
157.2
6.1
2.4
Fair Value
Amortized Cost
Fair Value
149.6 $
156.1
6.1
2.4
231.6 $
48.4
1.8
0.6
231.6
48.4
1.8
0.6
$
315.8 $
314.2 $
282.4 $
282.4
All available-for-sale securities have been classified as current, based on management’s intent and ability to use the funds in current operations.
Note 9. Fair Value Measurements
We determine fair value based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value assumes that the transaction to sell the asset or transfer the liability occurs in the
principal or most advantageous market for the asset or liability and establishes that the fair value of an asset or liability shall be determined based on the
assumptions that market participants would use in pricing the asset or liability. The classification of a financial asset or liability within the hierarchy
78
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be
used to measure fair value:
Level 1:
Level 2:
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3:
Inputs are unobservable inputs based on our assumptions.
The fair value of the Company’s Level 1 financial instruments, such as money market funds, which are traded in active markets, is based on quoted market
prices for identical instruments. The fair value of the Company’s Level 2 fixed income securities is obtained from an independent pricing service, which may use
quoted market prices for identical or comparable instruments or model driven valuations using observable market data or inputs corroborated by observable market
data. Our marketable securities are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various
asset price models. The Company’s procedures include controls to ensure that appropriate fair values are recorded, including comparing the fair values obtained
from the Company’s pricing service against fair values obtained from another independent source.
We estimate the fair value of the embedded derivative for the Series A Preferred Stock using the binomial lattice model. The lattice model requires the various
assumptions to be made to determine the fair value of the embedded derivatives. These assumptions represent Level 3 inputs. Refer to “ Note 12. Derivative
Liability ” in the Notes to Consolidated Financial Statements.
In February 2017, we completed the acquisition of a privately held company to enhance our manufacturing and vertical integration capabilities for a total
purchase consideration of $8.7 million . We estimated the fair value of our Level 3 contingent consideration related to this acquisition at the present value of the
expected contingent payments, determined using a probabilistic approach. We are required to reassess the fair value of contingent payments on a periodic basis.
We estimated the likelihood of meeting the production targets at 90 percent and recorded the fair value of such contingent consideration in accrued liabilities on the
consolidated balance sheet at the time of acquisition. There were no changes in the fair value of our contingent consideration during the years ended June 30, 2018
or July 1, 2017 . This contingent consideration will result in a cash payment of $3.0 million , if and when the production targets are achieved, which we expect to
occur within 36 months following the acquisition date.
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. Refer to “ Note 17. Employee Benefit Plans ” in the Notes
to Consolidated Financial Statements.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial assets and liabilities measured at fair value on a recurring basis are summarized below ( in millions ):
June 30, 2018
Assets:
Cash equivalents:
Certificates of deposit
Commercial paper
Money market funds
U.S. Treasury securities
U.S. Agency securities
Short-term investments:
Certificates of deposit
Commercial paper
Asset-backed securities
Corporate debt securities
Municipal bonds
Mortgage-backed securities
Foreign government bonds
Total assets
Other accrued liabilities:
Derivative liability
Acquisition contingencies
Total other accrued liabilities
July 1, 2017
Assets:
Cash equivalents:
Certificates of deposit
Commercial paper
Money market funds
Short-term investments:
Certificates of deposit
Asset-backed securities
Corporate debt securities
Municipal bonds
Foreign government bonds
U.S. Treasury
Total assets
Other accrued liabilities:
Derivative liability
Acquisition contingencies
Total other accrued liabilities
$
$
$
$
$
$
$
$
80
Level 1
Level 2
Level 3
Total
— $
—
0.8
143.6
—
—
—
—
—
—
—
—
3.0 $
— $
112.1
—
—
34.2
7.5
10.5
67.8
219.2
1.6
4.2
3.4
—
—
—
—
—
—
—
—
—
—
—
3.0
112.1
0.8
143.6
34.2
7.5
10.5
67.8
219.2
1.6
4.2
3.4
144.4 $
463.5 $
— $
607.9
— $
—
— $
— $
—
— $
52.4 $
2.7
55.1 $
Level 1
Level 2
Level 3
Total
— $
—
4.8
—
—
—
—
—
1.9
6.7 $
— $
—
— $
52.1 $
14.7
—
202.1
26.1
46.4
4.9
1.0
—
— $
—
—
—
—
—
—
—
—
347.3 $
— $
354.0
— $
51.6 $
—
— $
2.7
54.3 $
51.6
2.7
54.3
52.4
2.7
55.1
52.1
14.7
4.8
202.1
26.1
46.4
4.9
1.0
1.9
Table of Contents
LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets Measured at Fair Value on a Non-Recurring Basis
We periodically review our intangible and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows
resulting from use of the asset and its eventual disposition. If not recoverable, an impairment loss would be calculated based on the excess of the carrying amount
over the fair value.
Management utilizes various valuation methods, including an income approach, a market approach and a cost approach, to estimate the fair value of intangible
and other long-lived assets. During the annual impairment testing performed in fiscal 2018, we concluded that our intangible and other long-lived assets were not
impaired. No impairment charges were recorded in fiscal 2018, 2017, or 2016. Refer to “ Note 13. Goodwill and Other Intangible Assets ”.
Note 10. Non-Controlling Interest Redeemable Convertible Preferred Stock
On July 31, 2015, our wholly-owned subsidiary, Lumentum Inc., issued 40,000 shares of its Series A Preferred Stock to Viavi. Pursuant to a securities
purchase agreement between the Company, Viavi and Amada, 35,805 shares of Series A Preferred Stock were sold by Viavi to Amada in August 2015. The
remaining 4,195 shares of the Series A Preferred Stock were canceled. The Series A Preferred Stock is referred to as our Non-Controlling Interest Redeemable
Convertible Preferred Stock within these consolidated financial statements.
The Series A Preferred Stock is redeemable at the option of Amada after five years and classified as non-controlling interest redeemable convertible preferred
stock in our consolidated balance sheet. The Series A Preferred Stock is measured at its redemption value. We recognized a $9.7 million increase in the value of
the Series A Preferred Stock during the fiscal year ended July 2, 2016 to accrete to the redemption value of $35.8 million with a reduction to additional paid-in
capital. The Series A Preferred Stock value of $35.8 million as of June 30, 2018 has not changed from prior year.
The Series A Preferred Stock conversion feature is bifurcated from the Series A Preferred Stock and accounted for separately as a derivative liability. The
derivative liability is measured at fair value each reporting period with the change in fair value recorded in the consolidated statements of operations. Refer to “
Note 12. Derivative Liability ”.
The following paragraphs describe the terms and conditions of the Series A Preferred Stock:
Conversion
The Series A Preferred Stock is convertible, at the option of the holder, into shares of our common stock commencing on the second anniversary of the closing
of the securities purchase in August 2017 (absent a change of control of us or similar event) using a conversion price of $24.63 , which is equal to 125% of the
volume weighted average price per share of our common stock in the five “regular-way” trading days following the Separation.
Liquidation
Upon any liquidation, dissolution, or winding up of our business, whether voluntary or involuntary, holders of Series A Preferred Stock will be entitled to
receive, in preference to holders of common stock or any other class or series of our outstanding capital stock ranking in any such event junior to the Series A
Preferred Stock, an amount per share equal to the greater of (i) the Issuance Value of $1,000 per share for Series A Preferred Stock plus all accrued and unpaid
dividends thereon (whether or not authorized or declared) through the date of payment and (ii) the amount as would have been payable had all Series A Preferred
Stock been converted into common stock immediately prior to such liquidation event.
If upon occurrence of any such event, our assets legally available for distribution are insufficient to permit payment of the aforementioned preferential
amounts, then all of our assets legally available for distribution will be distributed ratably to the holders of the Series A Preferred Stock and to the holders of any
other class or series of our capital stock ranking on parity with the Series A Preferred Stock.
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Voting Rights
LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The shares of Series A Preferred Stock have no voting rights except as follows:
•
•
•
Authorize, approve, or make any change to the powers, preferences, privileges or rights of the Series A Preferred Stock;
Authorize or issue any additional shares of Series A Preferred Stock or reduce the number of shares of Series A Preferred Stock; or
Create, or hold capital stock in, any subsidiary that is not wholly-owned by the Company.
Dividends
Holders of Series A Preferred Stock, in preference to holders of common stock or any other class or series of our outstanding capital stock ranking in any such
event junior to the Series A Preferred Stock, are entitled to receive, when and as declared by the board of directors, quarterly cumulative cash dividends at the
annual rate of 2.5% of the Issuance Value per share on each outstanding share of Series A Preferred Stock. The accrued dividends are payable on March 31, June
30, September 30 and December 31 of each year commencing on September 30, 2015.
The accrued dividends as of June 30, 2018 and July 1, 2017 is $0.4 million and $0.2 million , respectively. During each of the years ended June 30, 2018 and
July 1, 2017 , we paid $0.7 million and $0.9 million , respectively, in dividends to the holders of Series A Preferred Stock.
Redemption
Optional redemption by the Company
On or after the third anniversary in August 2018, we will have the option upon providing notice of not less than 30 calendar days to redeem for cash all (but
not less than all) of the shares of Series A Preferred Stock at a redemption price equal to the Issuance Value plus the accrued and unpaid dividends on each share
and any past due dividends, whether or not authorized or declared.
Optional redemption by holders
Commencing on the fifth anniversary of the Issuance Date of the Series A Preferred Stock upon providing notice of not less than 30 calendar days, each holder
of Series A Preferred Stock may cause the Company to redeem for cash any number of shares of Series A Preferred Stock on any date at a redemption price for
share redeemed equal to the Issuance Value plus the accrued and unpaid dividends on each share and any past due dividends, whether or not authorized or
declared.
Note 11. Convertible Senior Notes
In March 2017, we issued the 2024 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as
amended (the “Securities Act”). The 2024 Notes are governed by an indenture between the Company, as the issuer, and U.S. Bank National Association, as trustee
(the “Indenture”). The 2024 Notes are unsecured and do not contain any financial covenants, restrictions on dividends, incurrence of senior debt or other
indebtedness, or the issuance or repurchase of securities by us.
The 2024 Notes bear interest at a rate of 0.25% per year. Interest on the 2024 Notes is payable semi-annually in arrears on March 15 and September 15 of each
year, beginning on September 15, 2017. The 2024 Notes will mature on March 15, 2024, unless earlier repurchased by us or converted pursuant to their terms.
The initial conversion rate of the 2024 Notes is 16.4965 shares of common stock per $1,000 principal amount of 2024 Notes, which is equivalent to an initial
conversion price of approximately $60.62 per share, a 132.5% premium to the fair market value at the date of issuance. Prior to the close of business on the
business day immediately preceding December 15, 2023, the 2024 Notes will be convertible only under the following circumstances: (1) during any fiscal quarter
(and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period
of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable
conversion price, or $78.80 , on each applicable trading day; (2) during the five consecutive business day period after any five consecutive trading day period (the
“measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of such measurement period was less than 98% of the
product of the last reported sale price of our common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified
corporate
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
events. On or after December 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may
convert their notes at any time. In addition, upon the occurrence of a make-whole fundamental change, we will, in certain circumstances, increase the conversion
rate by a number of additional shares for a holder that elects to convert 2024 Notes in connection with such make-whole fundamental change.
We may not redeem the 2024 Notes prior to their maturity date and no sinking fund is provided for the 2024 Notes. Upon the occurrence of a fundamental
change, holders may require us to repurchase all or a portion of their 2024 Notes for cash at a price equal to 100% of the principal amount of the 2024 Notes to be
repurchased, plus any accrued and unpaid interest.
We considered the features embedded in the 2024 Notes other than the conversion feature, including the holders’ put feature, our call feature, and the make-
whole feature, and concluded that they are not required to be bifurcated and accounted for separately from the host debt instrument.
Prior to the TMA settlement condition, because we could only settle the 2024 Notes in cash, we determined that the conversion feature met the definition of a
derivative liability. We separated the derivative liability from the host debt instrument based on the fair value of the derivative liability. As of the issuance date,
March 8, 2017, the derivative liability fair value of $129.9 million was calculated using the binomial valuation approach. The residual principal amount of the
2024 Notes of $320.1 million before issuance costs was allocated to the debt component. We incurred approximately $7.7 million in transaction costs in
connection with the issuance of the 2024 Notes. These costs were allocated to the debt component and recognized as a debt discount. We amortize the debt
discount, including both the initial value of the derivative liability and the transaction costs, over the term of the 2024 Notes using the effective interest method.
The effective interest rate of the 2024 Notes is 5.4% per year. As of June 30, 2018 , the remaining debt discount amortization period was 68 months.
During the year ended July 1, 2017, we satisfied the TMA settlement condition. As such, the value of the conversion option will no longer be marked to
market and was reclassified to additional paid-in capital within stockholders’ equity on our consolidated balance sheet. The value of the conversion option at the
time of issuance will be treated as an original issue discount for purposes of accounting for the debt component of the notes. The debt component will accrete up to
the principal amount over the expected term of the debt. These accounting standards do not affect the actual amount we are required to repay, and the amount
shown in the table below for the notes is the aggregate principal amount of the notes and does not reflect the debt discount we will be required to recognize.
The 2024 Notes consisted of the following components as of the years ended June 30, 2018 and July 1, 2017 ( in millions ):
Liability component:
Principal
Unamortized debt discount
Net carrying amount of the liability component
June 30, 2018
July 1, 2017
$
$
450.0 $
(115.8)
334.2 $
450.0
(132.5)
317.5
The following table sets forth interest expense information related to the 2024 Notes for the periods presented (in millions, except percentages) :
Contractual interest expense
Amortization of the debt discount
Total interest expense
Effective interest rate on the liability component
June 30, 2018
July 1, 2017
$
$
1.2
$
16.7
17.9
$
5.4%
0.4
5.1
5.5
5.4%
We have the ability and intent to settle the $450 million face value of the debt in cash. Therefore, we use the treasury stock method for calculating the dilutive
impact of the debt. The 2024 Notes will have no impact to diluted earnings per share until the average price of our common stock exceeds the conversion price of
$60.62 .
Note 12. Derivative Liability
We estimate the fair value of the embedded derivative for the Series A Preferred Stock using the binomial lattice model. We applied the lattice model to value
the embedded derivative using a “with-and-without method,” where the value of the Series A
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Preferred Stock, including the embedded derivative, is defined as the “with”, and the value of the Series A Preferred Stock, excluding the embedded derivative, is
defined as the “without”. The lattice model requires the following inputs: (i) the Company's common stock price; (ii) conversion price; (iii) term; (iv) yield; (v)
recovery rate for the Series A Preferred Stock; (vi) estimated stock volatility; and (vii) risk-free rate. The fair value of the embedded derivative was determined
using Level 3 inputs under the fair value hierarchy (unobservable inputs). Changes in the inputs into this valuation model have a material impact in the estimated
fair value of the embedded derivative. For example, a decrease (increase) in the stock price and the volatility results in a decrease (increase) in the estimated fair
value of the embedded derivative. The changes in the fair value of the bifurcated embedded derivative for the Series A Preferred Stock are primarily related to the
change in the price of our common stock and are reflected in the consolidated statements of operations as “Unrealized gain (loss) on derivative liabilities”.
Unrealized loss on derivative liability for the Series A Preferred Stock amounted to $0.8 million , $41.3 million , and $0.6 million for the fiscal years ended
June 30, 2018 , July 1, 2017 , and July 2, 2016 , respectively.
The following table provides a reconciliation of the fair value of the embedded derivative for the Series A Preferred Stock for the years ended June 30, 2018
and July 1, 2017 ( in millions ):
Balance as of beginning of period
Unrealized loss on the Series A Preferred Stock derivative liability
Balance as of end of period
June 30, 2018
July 1, 2017
$
$
51.6 $
0.8
52.4 $
10.3
41.3
51.6
The following table summarizes the assumptions used to determine the fair value of the embedded derivative for Series A Preferred Stock:
Stock price
Conversion price
Expected term (years)
Expected annual volatility
Risk-free rate
Preferred yield
$
$
June 30, 2018
57.90
24.63
2.11
50.0%
2.53%
8.58%
$
$
July 1, 2017
57.05
24.63
3.11
47.5%
1.57%
7.56%
On March 8, 2017, we issued $450 million in aggregate principal amount of 2024 Notes. On June 29, 2017, we satisfied the TMA settlement condition. As
such, we met the requirements to account for the conversion option of the 2024 Notes as equity and the conversion option is no longer marked to market. Refer to “
Note 11. Convertible Senior Notes ” in the Notes to Consolidated Financial Statements.
The following table provides a reconciliation of the fair value of the embedded derivative for the 2024 Notes for the year ended July 1, 2017 ( in millions ):
Balance as of beginning of period
Fair value of the embedded derivative for the 2024 Notes at issuance
Unrealized loss on the 2024 Notes derivative liability
Reclassification of the 2024 Notes derivative liability in connection with TMA settlement condition
Balance as of end of period
July 1, 2017
—
129.9
62.9
(192.8)
—
$
$
The following table summarizes the assumptions used to determine the fair value of the embedded derivative for the 2024 Notes at the issuance date and as of
June 29, 2017, when we satisfied the TMA settlement condition:
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Table of Contents
Stock price
Conversion price
Expected term (years)
Expected annual volatility
Risk-free rate
LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 29, 2017
March 8, 2017
$
$
$
$
57.30
60.62
6.7
47.5%
2.10%
45.50
60.62
7.0
45.0%
2.40%
Note 13. Goodwill and Other Intangible Assets
Goodwill
The following table presents the changes in goodwill by our reportable segments during the year ended June 30, 2018 ( in millions) :
Balance as of July 2, 2016
Acquisition of a business
Foreign currency translation adjustment
Balance as of July 1, 2017
Foreign currency translation adjustment
Balance as of June 30, 2018
Impairment of Goodwill
Optical Communications Commercial Lasers
5.4
— $
$
$
Total
5.6
0.3
5.9 $
—
5.9 $
—
0.1
5.5
(0.1)
$
5.4
$
$
$
5.4
5.6
0.4
11.4
(0.1)
11.3
We review goodwill for impairment during the fourth quarter of each fiscal year or more frequently if events or circumstances indicate that an impairment loss
may have occurred. During fiscal 2018 , there have been no events or circumstances that have required us to perform an interim assessment of goodwill for
impairment. In the fourth quarter of fiscal 2018 , we completed the annual impairment test of goodwill, which indicated there was no goodwill impairment.
Acquired Developed Technologies and Other Intangibles
The following tables present details of our acquired developed technologies and other intangibles as of the periods presented ( in millions ):
June 30, 2018
Acquired developed technologies
Other intangibles
Total intangible assets
July 1, 2017
Acquired developed technologies
Other intangibles (1)
Total intangible assets
Accumulated Amortization
Net
Gross Carrying Amount
$
105.5 $
$
7.0
112.5 $
Gross Carrying Amount
$
105.5 $
$
7.0
112.5
$
(98.5) $
(7.0)
(105.5) $
(95.4) $
(7.0)
(102.4)
$
7.0
—
7.0
10.1
—
10.1
Accumulated Amortization
Net
(1) We have reclassified certain prior period amounts to conform to current period presentation.
The amounts in the table above include cumulative foreign currency translation adjustments, reflecting movement in the currencies of the underlying
intangibles.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal 2018 , 2017 and 2016 , we recorded $3.2 million , $6.8 million , and $7.2 million , respectively, of amortization related to acquired developed
technologies and other intangibles. The following table presents details of amortization for the periods presented (in millions ):
Cost of sales
Operating expense
Total
June 30, 2018
Years Ended
July 1, 2017
July 2, 2016
$
$
3.2 $
—
3.2 $
6.5 $
0.3
6.8 $
6.8
0.4
7.2
Based on the carrying amount of acquired developed technologies as of June 30, 2018 , and assuming no future impairment of the underlying assets, the
estimated future amortization is as follows (in millions):
Fiscal Years
2019
2020
2021
2022
Thereafter
Total amortization
$
$
3.0
2.8
0.5
0.5
0.2
7.0
Note 14. 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. The following table summarizes the activity of restructuring and related charges during fiscal
2018 , 2017 and 2016 ( in millions ):
Balance as of beginning of period
Charges
Payments
Balance as of end of period
Years Ended
June 30, 2018
July 1, 2017
July 2, 2016
$
$
3.8 $
5.7 $
7.2
(9.1)
12.0
(13.9)
1.9 $
3.8 $
6.0
7.7
(8.0)
5.7
During fiscal 2018, we recorded $7.2 million in restructuring and related charges in the consolidated statements of operations.
•
•
During the fourth quarter of fiscal 2018, we initiated a new restructuring plan in order to realign the organization and enable further investment in key
priority areas. As a result, a restructuring charge of $3.4 million was recorded for severance costs and employee benefits. In total, there were 52
employees in manufacturing, R&D and SG&A functions that were terminated.
We also incurred restructuring and related charges of $3.8 million from restructuring plans approved prior to fiscal 2016 primarily related to
manufacturing facility in Bloomfield, Connecticut to transfer certain production processes into existing sites in the United States or to contract
manufacturers.
During fiscal 2017 and 2016 , we recorded $12.0 million and $7.7 million , respectively, in restructuring and related charges in the consolidated statements of
operations. Of the $12.0 million and $7.7 million charge recorded during fiscal 2017 and fiscal 2016, $2.1 million and $2.1 million , respectively, related to
severance, retention and employee benefits and there were no costs 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.
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Note 15. Income Taxes
LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our income (loss) before income taxes consisted of the following ( in millions ):
Domestic
Foreign
Income (loss) before income taxes
Our income tax (benefit) expense consisted of the following ( in millions ):
Years Ended
June 30, 2018
July 1, 2017
July 2, 2016
$
$
37.8 $
91.6
129.4 $
(78.4) $
18.6
(59.8) $
60.7
(51.0)
9.7
Years Ended
June 30, 2018
July 1, 2017
July 2, 2016
Federal:
Current
Deferred
State:
Current
Deferred
Foreign:
Current
Deferred
$
1.2 $
13.7 $
(120.4)
(119.2)
1.0
(1.3)
(0.3)
1.2
(0.4)
0.8
—
13.7
0.1
—
0.1
2.1
26.8
28.9
Total income tax (benefit) expense
$
(118.7) $
42.7 $
1.6
—
1.6
0.2
—
0.2
1.2
(2.6)
(1.4)
0.4
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The
Tax Act makes broad and complex changes to the U.S. tax code that affected our fiscal year ending June 30, 2018 including, but not limited to, (1) a reduction in
the U.S. federal corporate tax rate; (2) a transition tax on certain deferred income of foreign subsidiaries that, if the taxpayer so elects, is payable over eight years;
and (3) bonus depreciation that allows full expensing of qualified property. The Tax Act reduces the federal corporate tax rate to 21 percent effective January 1,
2018. Section 15 of the Internal Revenue Code stipulates that our fiscal year ending June 30, 2018 will have a blended corporate tax rate of 28 percent , which is
based on the applicable tax rates before and after the Tax Act and the number of days in each period.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should
not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company
must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting
for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial
statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the
provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Our accounting for the following elements of the Tax Act is incomplete. However, we were able to make reasonable estimates of certain effects and, therefore,
recorded provisional adjustments as follows:
•
•
•
The Tax Act reduces the corporate tax rate to 21 percent , effective January 1, 2018. For certain of our deferred tax assets and deferred tax liabilities, we
have recorded a provisional net decrease of deferred tax assets by $80.5 million (which we refined by $2.5 million decrease as of June 30, 2018 from our
initial estimate in our second quarter of fiscal 2018 in accordance with SAB 118), with a corresponding net adjustment to deferred income tax expense of
$80.5 million . While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses
related to the Tax Act, including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of
adjustments made to federal temporary differences.
The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of
certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-
1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Our initial estimate of the Transition Tax is
zero . We are continuing to gather additional information to more precisely compute the amount of the Transition Tax.
Due to complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act and the application of ASC 740. We are
allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-
period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred
method”). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine
whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether we expect to
have future U.S. inclusions in taxable income related to GILTI depends not only on our current structure and estimated future results of global operations
but also on our intent and ability to modify our structure and/or our business; as such, we are not yet able to reasonably estimate the effect of this
provision of the Tax Act. Therefore, we have not made any adjustments related to potential GILTI tax in our financial statements and have not made a
policy decision regarding whether to record deferred taxes on GILTI.
The net income tax expense related to the enactment of the Tax Act has been accounted for during fiscal 2018 based on provisional estimates pursuant to SAB
118. Subsequent adjustments, if any, will be accounted for in the period such adjustments are identified. The provisional estimates incorporate, among other
factors, assumptions made based on interpretations of the Tax Act and existing tax laws and a range of historical financial and tax-specific facts and information.
The Company’s effective tax rate differs from the U.S. Federal statutory income tax rate as follows ( in millions ):
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended
June 30, 2018
July 1, 2017
July 2, 2016
Income tax (benefit) expense computed at federal statutory rate
$
36.3 $
(20.9) $
State taxes, net of federal benefit
Foreign rate differential
Change in valuation allowance
U.S. Tax reform
Research and experimentation benefits and other tax credits
Permanent items
Stock-based compensation
Fair value adjustment
Subpart F
Unrecognized tax benefits
Tax holiday
Return to provision
Other
(0.5)
(26.4)
(206.0)
80.5
(11.0)
(0.8)
(1.0)
0.2
2.0
7.9
2.1
(1.8)
(0.2)
0.1
(4.8)
21.5
—
(2.9)
0.3
4.9
36.5
—
8.4
0.1
(0.1)
(0.4)
Total income tax (benefit) expense
$
(118.7) $
42.7 $
3.4
0.1
21.3
(29.4)
—
(4.4)
0.7
4.3
—
4.0
—
—
(0.1)
0.5
0.4
The comparability of our operating results in fiscal 2018 compared to the corresponding prior year periods was impacted by the Tax Act, which reduces the
U.S. federal corporate tax rate from 35% to 21%.
During fiscal 2018, our provision for income taxes decreased primarily as a result of $207.2 million of income tax benefit related to the release of valuation
allowance against our U.S. federal and certain state deferred tax assets, partially offset by $80.5 million of income tax expense related to the remeasurement of our
net deferred tax assets as a result of reduction in the U.S. federal corporate tax rate. Our provision for income taxes was also impacted by the benefit of our foreign
income being taxed at lower rates than the U.S. statutory rate, as well as the benefit of research and development tax credits.
The components of our net deferred taxes consisted of the following ( in millions ):
Gross deferred tax assets:
Intangibles
Tax credit carryforwards
Net operating loss carryforwards
Inventories
Accruals and reserves
Fixed assets
Capital loss carryforwards
Unclaimed research and experimental development expenditure
Other
Stock-based compensation
Gross deferred tax assets
Valuation allowance
Deferred tax assets
Gross deferred tax liabilities:
Intangible amortization
Convertible notes
Deferred tax liabilities
Total net deferred tax assets
Years Ended
June 30, 2018
July 1, 2017
$
123.3 $
217.4
47.1
7.1
12.4
7.2
10.1
12.3
25.6
0.5
3.5
249.1
(99.4)
149.7
(0.8)
(23.6)
(24.4)
$
125.3 $
34.9
11.5
11.7
19.7
11.4
12.4
23.0
0.4
3.1
345.5
(296.4)
49.1
(1.1)
(44.4)
(45.5)
3.6
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities for fiscal 2017 does not include certain deferred tax
assets that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation that are greater than the compensation
recognized for financial reporting. As a result of adopting ASU 2016-09 in fiscal 2018, $2.6 million of excess tax benefits that were not previously recognized
because the related tax deduction had not reduced current taxes payable were recorded to retained earnings as of the beginning of fiscal 2018.
We assess our ability to realize the deferred tax assets on a quarterly basis and establish a valuation allowance if the deferred tax assets are not more-likely-
than-not to be realized. We weigh all available positive and negative evidence, including our earnings history and results of recent operations, reversals of deferred
tax liabilities, projected future taxable income, and tax planning strategies.
As of each reporting date, we consider new evidence, both positive and negative, that could affect our view of the future realization of deferred tax assets.
During fiscal 2018, we determined that there is sufficient positive evidence to conclude that it is more-likely-than-not that the U.S. federal and certain states
deferred tax assets are realizable. We, therefore, released the valuation allowance against our U.S. federal and certain states resulting in an income tax benefit of
$207.2 million . The valuation allowance against our deferred tax assets decreased by $25.0 million in fiscal 2017 primarily due to the amortization of intangible
assets, utilization of tax attributes, and the tax effects of the 2024 Notes.
Due to the weight of negative evidence, we continue to maintain a full valuation allowance on our California and partial valuation allowance on our Canadian
deferred tax assets. In the event the Company determines that it will be able to realize all or part of the California or Canada deferred tax assets in the future, the
valuation allowance will be reversed in the period in which the Company makes such determination. The release of a valuation allowance against deferred tax
assets may cause greater volatility in the effective tax rate in the periods in which it is reversed. Based on the information currently available, we do not believe
that a significant portion of our valuation allowance for California and Canada will be released in the next 12 months. Such a release would result in the
recognition of certain deferred tax assets and a decrease in the income tax expense for the period in which the release is recorded.
As a result of certain capital funding, capital investments and hiring requirements, income from operations in Thailand was exempt from income tax in fiscal
2018. Because the Thailand subsidiary incurred losses, the tax holiday had the effect of increasing the overall foreign taxes by $2.1 million for fiscal 2018. The loss
of tax benefit due to the tax holiday on net income per share (diluted) was $0.03 for fiscal 2018.
As of June 30, 2018, the Company had federal and foreign net operating loss carryforwards of $5.5 million and $24.3 million , respectively. These
carryforwards will begin to expire in the fiscal years ending 2022 and 2025, respectively. The federal net operating loss carryforwards are subject to Internal
Revenue Code Section 382 which imposes limitations on annual utilization after a change of ownership.
Additionally, the Company has federal, state, and foreign research and other tax credit carryforwards of $8.7 million , $17.7 million , and $45.4 million ,
respectively. The federal credits will begin to expire in the fiscal year ending 2037 and California credits can be carried forward indefinitely. The foreign tax
credits will begin to expire in the fiscal year ending 2020.
We expect the Tax Act to generally provide greater flexibility for us to access and utilize our cash, cash equivalent and marketable securities balances held by
certain of our foreign subsidiaries as of January 1, 2018, as well as for prospective assets generated by these foreign subsidiaries’ future earnings and profits due to
the creation of a quasi-territorial tax system that 1) generally allows companies to repatriate certain foreign source earnings without incurring additional U.S.
income tax for such earnings generated after December 31, 2017 and 2) generally requires companies to pay a one-time transition tax on certain foreign subsidiary
earnings generated prior to December 31, 2017 that, in substantial part, were previously tax deferred. In light of these changes, we intend to repatriate the earnings
of our subsidiaries in the Cayman Islands and Hong Kong. As to all other foreign subsidiaries, we intend to reinvest these earnings indefinitely outside of the U.S.
As a result, U.S. income and foreign withholding taxes associated with the repatriation of $11.4 million of undistributed earnings of foreign subsidiaries, other than
the Cayman Islands and Hong Kong subsidiaries, have not been provided for. We estimate that an additional $0.9 million of foreign withholding taxes would have
to be provided if these earnings were repatriated back to the U.S.
The aggregate changes in the balance of our unrecognized tax benefits between July 2, 2016 and June 30, 2018 is as follows ( in millions ):
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Balance at July 2, 2016
Additions based on the tax positions related to the prior year
Additions based on tax positions related to current year
Balance at July 1, 2017
Additions based on the tax positions related to the prior year
Additions based on tax positions related to current year
Balance at June 30, 2018
$
$
$
2.2
1.6
9.5
13.3
1.2
11.3
25.8
Included in the balance of unrecognized tax benefits as of June 30, 2018 is $5.2 million of tax benefits that, if recognized, would result in tax benefit.
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 30, 2018 and July 1, 2017 were $0.9 million and $0.9 million , respectively. During fiscal 2018, accrued interest and penalties
increased by an immaterial amount.
We file income tax returns in the US federal jurisdiction as well as many US states and foreign jurisdictions. The major tax jurisdictions where we file tax
returns are the U.S. federal government, the state of California, Thailand and Canada. The U.S. federal corporation income tax returns beginning with fiscal 2015
tax year remain subject to examination by the Internal Revenue Service, or IRS. The California corporation income tax returns beginning with the fiscal year 2016
will remain subject to examination by the California Franchise Tax Board. The Canada corporation income tax returns beginning with the 2011 year remain subject
to examination by the Canadian tax authorities. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes
generated in those early years which have been carried forward and may be audited in subsequent years when utilized.
We are subject to the continuous examination of income tax returns by various foreign tax authorities. The timing of resolutions and closures of tax audits is
highly unpredictable. Given the uncertainty, it is reasonably possible that certain tax audits may be concluded within the next 12 months that could materially
impact the balance of our gross unrecognized tax benefits. An estimate of the range of increase or decrease that could occur in the next twelve months cannot be
made. However, the estimated impact to tax expense and net income from the resolution and closure of tax exams is not expected to be significant within the next
12 months.
On July 24, 2018, the Ninth Circuit Court of Appeals (the “Court”) issued an opinion in Altera Corp. v. Commissioner requiring related parties in an
intercompany cost sharing arrangement to share expenses related to share-based compensation. This opinion reversed the prior decision of the United States Tax
Court. On August 7, 2018, the Court withdrew the opinion issued on July 24, 2018 to allow time for a reconstituted panel of judges to confer. We will continue to
monitor the case.
Note 16. Stock-Based Compensation and Stock Plans
Description of Lumentum Stock-Based Benefit Plans
Stock Option Plans
On June 23, 2015, we adopted, and the board of directors of JDSU approved, the 2015 Equity Incentive Plan (the “2015 Plan”) under which 8.5 million
shares of our common stock were authorized for issuance, which was ratified by our board of directors in August 2015. In connection with our Separation from
JDSU on July 31, 2015, outstanding JDSU equity-based awards held by service providers continuing in service after the Separation were converted into equity-
based awards under the 2015 Plan reducing the number of shares remaining available for grant under the 2015 Plan. Immediately following our Separation from
JDSU, 2.1 million shares of our common stock were reserved pursuant to outstanding equity-based awards under the 2015 Plan that were converted from JDSU
equity-based awards.
On November 4, 2016, our stockholders approved an amendment to increase the number of shares that may be issued under the 2015 Plan by 3.0 million
shares, and certain other material terms of the 2015 Plan.
As of June 30, 2018 , we had 1.9 million shares subject to stock options, restricted stock units, restricted stock awards, and performance stock units issued
and outstanding under the 2015 Plan. Restricted stock units, restricted stock awards, and performance stock units are performance-based, time-based or a
combination of both and are expected to vest over one to four years. The fair value of these grants is based on the closing market price of our common stock on the
date of award.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The exercise price for stock options is equal to the fair value of the underlying stock at the date of grant. We issue 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.
As of June 30, 2018 , 5.6 million shares of common stock under the 2015 Plan were available for grant.
Employee Stock Purchase Plan
On June 23, 2015, we adopted, and the board of directors of JDSU approved, the 2015 Employee Stock Purchase Plan (the “2015 Purchase Plan”) under
which 3.0 million shares of our common stock were authorized for issuance, which was ratified by our board of directors in August 2015. The 2015 Purchase Plan
provides eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions and provides a 15%
purchase price discount as well as a six -month look-back period. The 2015 Purchase Plan is structured as a qualified employee stock purchase plan under Section
423 of the Internal Revenue Code of 1986. However, the 2015 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 2015
Purchase Plan will terminate upon the date on which all shares available for issuance have been sold. Of the 3.0 million shares authorized under the 2015 Purchase
Plan, 2.3 million shares remained available for issuance as of June 30, 2018 .
Restricted Stock Units
Restricted stock units (“RSUs”) under the 2015 Plan are grants of shares of our common stock, the vesting of which is based on the requisite service
requirement. Generally, our RSUs are subject to forfeiture and expected to vest over one to four years. For annual refresh grants, RSUs generally vest ratably on an
annual, or combination of annual and quarterly, basis over three years.
Restricted Stock Awards
Restricted stock awards (“RSAs”) under the 2015 Plan are grants of shares of our common stock that are subject to various restrictions, including restrictions
on transferability and forfeiture provisions. RSAs are expected to vest over one to four years, and the shares acquired may not be transferred by the holder until the
vesting conditions (if any) are satisfied.
Performance Stock Units
Performance stock units (“PSUs”) under the 2015 Plan are grants of shares of our common stock that vest upon the achievement of certain performance and
service conditions. We begin recognizing compensation expense when we conclude that it is probable that the performance conditions will be achieved. We
reassess the probability of vesting at each reporting period and adjust our compensation cost based on this probability assessment. Our PSUs are subject to risk of
forfeiture until performance and service conditions are satisfied and generally vest over three years.
During fiscal 2018 , we granted 0.1 million PSUs to senior members of our management team and recorded $2.4 million expense related to these grants based
on the revenue performance condition that was achieved in fiscal 2018.
Stock-Based Compensation
The impact on our results of operations of recording stock-based compensation by function for fiscal 2018 , 2017 and 2016 was as follows (in millions) :
Cost of sales
Research and development
Selling, general and administrative
Years Ended
June 30, 2018
July 1, 2017
July 2, 2016
$
$
12.6 $
14.2
20.0
46.8 $
7.5 $
11.6
13.6
32.7 $
6.1
9.0
11.8
26.9
Approximately $2.6 million and $1.8 million of stock-based compensation was capitalized to inventory as of June 30, 2018 and July 1, 2017 . The table
above includes allocated stock-based compensation from Viavi of $2.0 million for fiscal 2016 . There were no allocations to stock-based compensation from Viavi
during the years ended June 30, 2018 and July 1, 2017. Refer to “ Note 3. Related Party Transactions ” in the Notes to Consolidated Financial Statements.
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Option and Stock Award Activity
We did not grant any stock options during fiscal 2018 or 2017 . During fiscal 2018 and 2017 , there were 44,784 options and 239,753 options exercised.
As of June 30, 2018 , there were no options outstanding under the 2015 Plan. As of June 30, 2018 and July 1, 2017 , the total intrinsic value of options
exercised by our employees was $0.9 million and $5.6 million , respectively.
In connection with these exercises, the excess tax benefit realized during the year ended July 1, 2017 was $3.8 million . In fiscal 2018 , due to adoption of
ASU 2016-09, all excess tax benefits and deficiencies were recognized in the income tax provision in the consolidated statements of operations, rather than in
additional paid-in-capital in the consolidated balance sheets. Refer to “ Note 2. Recent Accounting Pronouncements ” in the Notes to Consolidated Financial
Statements for further discussion on the impact of the adoption of ASU 2016-09.
The following table summarizes our awards activity in fiscal 2018 , 2017, and 2016 (amounts in millions except per share amounts) :
Unvested balance as of June 27, 2015
Granted
Exercised / Vested
Canceled
Unvested balance as of July 2, 2016
Granted
Exercised / Vested
Canceled
Unvested balance as of July 1, 2017
Granted (1)
Vested
Canceled
Unvested balance as of June 30, 2018
Options
Restricted Stock Units
Weighted-
Average
Grant Date
Fair Value
per Share
$
19.01
Number of
Shares
0.5
Number of
Shares
1.5
Weighted-
Average
Grant Date
Fair Value
per Share
Restricted Stock Awards
Weighted-
Average
Grant Date
Fair Value
per Share
Number of
Shares
$
23.81
20.39
23.77
21.85
— $
—
—
—
$
21.31
— $
35.57
22.26
23.78
0.3
—
—
—
—
—
—
—
32.51
—
—
$
27.88
0.3
$
32.51
54.52
26.62
38.82
—
(0.2)
—
—
32.51
—
1.9
(0.7)
(0.2)
2.5
1.0
(1.4)
(0.2)
1.9
1.1
(1.1)
(0.2)
Performance Stock Units
Weighted-
Average
Grant Date
Fair Value
per Share
14.40
Number of
Shares
0.2 $
—
(0.1)
—
—
14.40
—
0.1 $
14.40
—
(0.1)
—
— $
0.1
—
—
—
14.40
—
—
52.00
—
—
1.7
$
43.08
0.1
$
32.51
0.1 $
52.00
—
(0.2)
—
—
15.21
—
0.3
$
17.83
—
(0.3)
—
14.29
—
— $
—
—
—
— $
—
—
—
—
—
—
(1) PSUs granted represent 100% of target goal; under the terms of the awards, the recipient may earn between 0% and 200% of the original grant. The
performance condition has been achieved during the year ended June 30, 2018.
As of June 30, 2018 , $65.5 million of stock-based compensation cost related to awards granted to our employees remains to be amortized. That cost is
expected to be recognized over an estimated amortization period of 1.8 years .
A summary of awards available for grant is as follows (in millions) :
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Table of Contents
Balance as of June 27, 2015
Authorized
Granted
Canceled
Balance as of July 2, 2016
Authorized
Granted
Canceled
Balance as of July 1, 2017
Granted
Canceled
Balance as of June 30, 2018
Awards Available
for Grant
—
8.5
(4.0)
0.2
4.7
3.0
(1.3)
0.2
6.6
(1.2)
0.2
5.6
Employee Stock Purchase Plan Activity
The 2015 Purchase Plan expense for the years ended June 30, 2018 and July 1, 2017 was $3.3 million and $2.7 million , respectively. The expense related to
the 2015 Purchase Plan is recorded on a straight-line basis over the relevant subscription period. During fiscal 2018 and 2017 , there were 191,703 shares and
314,800 shares issued to employees through the 2015 Purchase Plan with the average fair market value at the purchase date of $48.50 and $25.64 , respectively.
We estimate the fair value of the 2015 Purchase Plan shares on the date of grant using the Black-Scholes option-pricing model. The assumptions used to
estimate the fair value of the 2015 Purchase Plan shares to be issued during the periods presented were as follows:
Expected term (years)
Expected volatility
Risk-free interest rate
Dividend yield
Note 17. Employee Benefit Plans
Employee Retirement Plans
June 30, 2018
July 1, 2017
0.5
58.8%
2.02%
—%
0.5
46.0%
0.62%
—%
In the United States, the Company sponsors the Lumentum 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 deductions. The 401(k) Plan allows employees to contribute up to 50% of their
annual compensation, with contributions limited to $18,500 in calendar year 2018 as set by the Internal Revenue Service.
In Canada, the Company sponsors the Group Registered Retirement Savings (the “RRSP”) and Deferred Profit Sharing Plan (the “DPSP”), a defined
contribution plan which provides retirement benefits for its eligible employees through tax deferred salary deductions. The plan allows employees to contribute up
to 5% of their eligible earnings in a pay period, with contributions limited to in calendar year 2018 up to $19,953 (1) for the RRSP and $10,079 (2) for the DPSP, per
Canada Revenue Agency. The RRSP contributions in excess of 5% of earnings are not subject to an employer’s contributions.
The Company also makes a matching contribution equal to 100% of employees’ before-tax contributions up to 3% of their compensation and 50% of
employees’ before-tax contributions to the next 2% of their compensation. The Company match is contributed on a per-pay-period basis and is based on
employees’ before-tax contributions and compensation each pay period for both the United Stated and Canada retirement plans.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employees are eligible for match contributions after completing 180 days of service. All matching contributions are made in cash and vest immediately under
both retirement plans. In fiscal 2018 and 2017, we made matching contributions to the 401(k) Plan in the amount of $3.4 million and $4.0 million , respectively. In
fiscal 2018 and 2017, we made matching contributions in the amount of $1.3 million and $0.7 million under our Canada retirement plan.
(1) CA $26,230 converted to U.S. dollars using the applicable exchange rate on June 30, 2018 (i.e., $0.7713 ), the last business day of fiscal 2018.
(2) CA $13,250 converted to U.S. dollars using the applicable exchange rate on June 30, 2018 (i.e., $0.7713 ), the last business day of fiscal 2018.
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 30, 2018 , 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 2018, 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 participants and our net periodic cost principally using actuarial
valuations provided by third-party actuaries. The net obligation of $3.5 million as of June 30, 2018 is recorded in our consolidated 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
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
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 (1)
Accumulated benefit obligation
95
Pension Benefit Plan
2018
2017
$
11.0 $
0.9
0.1
0.5
(0.3)
0.4
(0.5)
8.2
0.6
—
0.5
0.5
0.9
0.3
$
$
$
$
$
12.1 $
11.0
7.1 $
0.3
0.5
0.5
0.4
(0.2)
8.6 $
(3.5) $
11.0 $
4.7
0.1
0.8
0.5
0.9
0.1
7.1
(3.9)
8.2
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) As of June 30, 2018 and July 1, 2017, $3.5 million and $3.9 million , related to a funded status of the pension obligation, respectively, are included in
other non-current liabilities on our consolidated balance sheet. Refer to “ Note 7. Balance Sheet Details ” in the Notes to Consolidated Financial Statements.
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 plan’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:
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
2018
2017
0.7%
2.8%
2.3%
1.0%
2.3%
0.2%
3.2%
2.3%
0.7%
2.3%
The following table sets forth the plan’s assets at fair value and the percentage of assets allocations as of June 30, 2018 (in millions, except percentage data ).
Assets:
Global equity
Fixed income
Alternative investment
Cash
Other
Total Assets
Target Allocation
Total
Percentage of Plan
Asset
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable Inputs
(Level 2)
Fair value measurement as of
June 30, 2018
28% $
30%
18%
1%
23%
$
2.4
2.8
1.5
0.2
1.7
8.6
96
28% $
— $
33%
17%
1%
21%
—
—
0.2
—
100% $
0.2 $
2.4
2.8
1.5
—
1.7
8.4
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the plan’s assets at fair value and the percentage of assets allocations as of July 1, 2017 (in millions, except percentage data ).
Assets:
Global equity
Fixed income
Alternative investment
Cash
Other
Total Assets
Target Allocation
Total
Percentage of Plan
Asset
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable Inputs
(Level 2)
Fair value measurement as of
July 1, 2017
24% $
35%
15%
1%
25%
$
1.7
2.5
1.6
0.1
1.2
7.1
24% $
— $
35%
23%
1%
17%
—
—
0.1
—
100% $
0.1 $
1.7
2.5
1.6
—
1.2
7.0
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 approach, we expect future benefit payments to be $1.1 million
during the 10 year period between fiscal 2019 and fiscal 2028 and the remaining $2.4 million of payments in fiscal years subsequent to fiscal 2028.
Note 18. 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 30, 2018 the future minimum
annual lease payments under non-cancellable operating leases were as follows ( in millions ):
Fiscal Years
2019
2020
2021
2022
2023
Thereafter
Total minimum operating lease payments
$
$
11.6
6.5
5.1
3.4
2.4
1.8
30.8
Rental expense relating to building and equipment was $12.1 million , $10.1 million , and $7.4 million in fiscal 2018 , 2017 and 2016 , respectively.
Capital Lease
As of June 30, 2018 , equipment acquired under a capital lease agreement was $15.6 million . Our capital lease asset is included in property, plant and
equipment, net in our consolidated balance sheets as of June 30, 2018 . Amortization expense on this capital lease asset is recorded as depreciation expense and is
included in cost of sales in our consolidated statements of operations during
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
fiscal 2018 . Our capital lease obligation is recorded at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate
future minimum lease payments and is included in other current liabilities and other non-current liabilities in our consolidated balance sheets as of June 30, 2018 .
Refer to “ Note 7. Balance Sheet Details ” for capital lease obligation amounts in other current liabilities and other non-current liabilities. Interest on these
obligations is included in interest expense in our consolidated statements of operations.
As of June 30, 2018 the future minimum annual lease payments under our capital lease were as follows ( in millions ):
Fiscal Years
2019
2020
Total minimum capital lease payments
Less: amount representing interest
Present value of capital lease obligation
Acquisition Contingencies
$
$
$
$
9.0
0.4
9.4
(0.1)
9.3
We incurred liabilities in the amount of $3.6 million in connection with the fiscal 2017 acquisition. The amount of $2.7 million is payable in 36 months
following the acquisition date contingent upon meeting certain production targets. We also retained $0.9 million of the purchase price as security for any potential
liabilities of the seller under the representations, warranties and indemnifications included in the purchase agreement, the amount was fully paid to the seller
subsequent to the year ended June 30, 2018 .
In March 2018, we entered into the Merger Agreement to acquire Oclaro. As of August 23, 2018, the total transaction consideration was expected to be
approximately $1.7 billion , which would be funded by a combination of $700 million in Lumentum common stock, $500 million in new debt, and the remaining
amount from the cash balances of the combined company. We expect the acquisition to close in the second half of calendar 2018, subject to customary closing
conditions.
0.25% Convertible Senior Notes due 2024
The future interest and principal payments related to the 2024 Notes are as follows as of June 30, 2018 :
Fiscal Years
2019
2020
2021
2022
2023
Thereafter
Total 2024 Notes payments
Purchase Obligations
$
$
1.1
1.1
1.1
1.1
1.1
451.2
456.7
Purchase obligations of $173.5 million as of June 30, 2018 , represent legally-binding commitments to purchase inventory and other commitments made in
the normal course of business to meet operational requirements. Although open purchase orders are considered enforceable and legally binding, the terms generally
allow the option to cancel, reschedule and adjust the requirements based on our business needs prior to the delivery of goods or performance of services.
Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year.
We depend on a limited number of contract manufacturers, subcontractors and suppliers for raw materials, packages and standard components. We generally
purchase these single or limited source products through standard purchase orders or one-year supply agreements and have no significant long-term guaranteed
supply agreements with such vendors. While we seek to maintain a sufficient safety stock of such products and maintain on-going communications with our
suppliers to guard against interruptions or cessation of supply, our business and results of operations could be adversely affected by a stoppage or delay of supply,
substitution
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 months to five years. We estimate the costs of our warranty obligations on an annualized basis based on our historical experience
of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. In addition,
from time to time, specific warranty accruals may be made if unforeseen technical problems arise with specific products. We assess the adequacy of our recorded
warranty liabilities and adjust the amounts as necessary.
The following table presents the changes in our warranty reserve during fiscal 2018 and fiscal 2017 ( in millions ):
Balance as of beginning of year
Provision for warranty (1)
Utilization of reserve
Balance as of year end
Years Ended
June 30, 2018
July 1, 2017
$
$
9.7 $
5.0
(8.1)
6.6 $
2.8
14.9
(8.0)
9.7
(1) This does not include a settlement payment of $5.1 million received from a vendor for a quality issue during fiscal 2018 .
Environmental Liabilities
Our research and development (“R&D”), manufacturing and distribution operations involve the use of hazardous substances and are regulated under
international, federal, state and local laws governing health and safety and the environment. We apply strict standards for protection of the environment and
occupational health and safety to sites inside and outside the United States, even if not subject to regulations imposed by foreign governments. We believe that our
properties and operations at our facilities comply in all material respects with applicable environmental laws and occupational health and safety laws. However, the
risk of environmental liabilities cannot be completely eliminated and there can be no assurance that the application of environmental and health and safety laws
will not require us to incur significant expenditures. We are also regulated under a number of international, federal, state and local laws regarding recycling,
product packaging and product content requirements. The environmental, product content/disposal and recycling laws are gradually becoming more stringent and
may cause us to incur significant expenditures in the future.
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 the aggregate, will not have a material adverse impact on our financial position, results of operations or statements of
cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. We accrue for loss contingencies
when it is both probable that we will incur the loss and when we can reasonably estimate the amount of the loss or range of loss.
Indemnifications
In the normal course of business, we enter into agreements that contain a variety of representations and warranties and provide for general indemnification.
Exposure under these agreements is unknown because claims may be made against us in the future and we may record charges in the future as a result of these
indemnification obligations. As of June 30, 2018 , we did not have any material indemnification claims that were probable or reasonably possible.
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Audit Proceedings
LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We are under audit by various domestic and foreign tax authorities with regards to income tax and indirect tax matters. In some, although not all cases, we
have reserved for potential adjustments to our provision for income taxes and accrual of indirect taxes that may result from examinations by these tax authorities or
final outcomes in judicial proceedings, and we believe that the final outcome of these examinations, agreements or judicial proceedings will not have a material
effect on our results of operations. If events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result in the
recognition of benefits in the period we determine the liabilities are no longer necessary. If our estimates of the federal, state, and foreign income tax liabilities and
indirect tax liabilities are less than the ultimate assessment, it could result in a further charge to expense.
Note 19. Operating Segments and Geographic Information
Our chief executive officer is our Chief Operating Decision Maker (“CODM”). The CODM allocates resources to the segments based on their business
prospects, competitive factors, net revenue and gross margin. We do not track all of our property, plant and equipment by operating segments. The geographic
identification of these assets is set forth below.
We are an industry leading provider of optical and photonic products defined by revenue and market share addressing a range of end-market applications
including optical communications and commercial lasers. We have two operating segments, Optical Communications, which we refer to as OpComms, and
Commercial Lasers, which we refer to as Lasers. Our OpComms products address the following markets: telecommunications (“Telecom”), data communications
(“Datacom”), and consumer and industrial(“Consumer and Industrial”). 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.
OpComms
Our OpComms products address the following markets: Telecom, Datacom and Consumer and Industrial.
Our OpComms products include a wide range of components, modules and subsystems to support and maintain customers including carrier networks for
access (local), metro (intracity), long-haul (city-to-city and worldwide) and, submarine (undersea). Additionally, our products address enterprise, cloud, and data
center applications, including SANs, LANs, and 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 these fast growing OpComms markets through our extensive product portfolio, including ROADMs, tunable
10-gigabit small form-factor pluggable transceivers and tunable small form-factor pluggable transceivers. Our 10G, 40G legacy transceivers and a growing
portfolio of 100G pluggable transceivers support LAN/SAN/WAN needs and the cloud for customers building enterprise and hyperscale data center networks.
Additionally, we are engaging customers in the sale of laser chips for use in the manufacture of high-speed transceivers.
In the Consumer and Industrial market, our OpComms products include laser light sources, which are integrated into 3D sensing platforms being used in
applications for mobile devices, gaming, computers, and other consumer electronics devices. New emerging applications include virtual and augmented reality, as
well as automotive and industrial segments. Our products include VCSELs and edge emitting lasers which are used in 3D sensing depth imaging systems. These
systems simplify the way people interact with technology by enabling the use of natural user interfaces. Systems are used for biometric identification, surveillance,
and process efficiency, among numerous other application spaces. Emerging applications for this technology include various mobile device applications,
autonomous vehicles, self-navigating robotics and drones in industrial applications and 3D capture of objects coupled with 3D printing. In addition, our industrial
diode lasers are used primarily as pump sources for pulsed and CW Fiber Lasers.
Lasers
Our Lasers products serve our customers in markets and applications such as sheet metal processing, general manufacturing, biotechnology, graphics and
imaging, remote sensing, and precision machining such as drilling in printed circuit boards, wafer singulation, glass cutting and solar cell scribing.
Our Lasers products are used in a variety of OEM applications including diode-pumped solid-state, fiber, diode, direct-diode and gas lasers such as argon-ion
and helium-neon lasers. Fiber lasers provide kW-class output powers combined with excellent beam quality and are used in sheet metal processing and metal
welding applications. Diode-pumped solid-state lasers provide
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
We also provide high-powered and ultrafast lasers for the industrial and scientific markets. Manufacturers use high-power, ultrafast lasers to create micro parts
for consumer electronics and to process semiconductor, LED, and other types of chips. Use of ultrafast lasers for micromachining applications is being driven
primarily by the increasing use of consumer electronics and connected devices globally.
We do not allocate research and development, sales and marketing, or general and administrative expenses to our segments because management does not
include the information in its measurement of the performance of the operating segments. In addition, we do not allocate amortization and impairment of
acquisition-related intangible assets, stock-based compensation and certain other charges impacting the gross margin of each segment because management does
not include this information in its measurement of the performance of the operating segments.
Information on reportable segments utilized by our CODM is as follows ( in millions) :
Net revenue:
OpComms
Lasers
Net revenue
Gross profit:
OpComms
Lasers
Total segment gross profit
Unallocated corporate items:
Stock-based compensation
Amortization of intangibles
Other charges (1)
Gross profit
June 30, 2018
Years Ended
July 1, 2017
July 2, 2016
$
$
1,059.2 $
188.5
1,247.7 $
857.8 $
143.8
1,001.6 $
402.3
82.8
485.1
(12.6)
(3.2)
(37.2)
287.3
59.9
347.2
(7.5)
(6.5)
(15.1)
$
432.1 $
318.1 $
761.3
141.7
903.0
236.3
61.4
297.7
(6.1)
(6.8)
(7.5)
277.3
(1) The increase in “Other charges” of unallocated corporate items during fiscal 2018 compared to fiscal 2017 , primarily relates to set-up costs of our facility
in Thailand, including costs of transferring product lines to Thailand of $27.0 million in our fiscal 2018 compared to $1.8 million in fiscal 2017. The increase in
“Other charges” of unallocated corporate items during fiscal 2017 compared to fiscal 2016, primarily relates to inventory write-downs due to canceled programs
not allocated to the segments of $7.9 million incurred in fiscal 2017.
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 markets which accounted for 10% or
more of our total net revenue during the periods presented:
OpComms:
Telecom
Datacom
Consumer and Industrial
Lasers
June 30, 2018
Years Ended
July 1, 2017
July 2, 2016
84.9%
38.1%
12.1%
34.7%
15.1%
85.6%
61.0%
20.1%
4.5%
14.4%
84.3%
61.5%
18.1%
4.7%
15.7%
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We operate in three geographic regions: Americas, Asia-Pacific, and EMEA (Europe, Middle East, and Africa). Net revenue is assigned to the geographic
region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one
country, which may differ from the location of their end customers. The following table presents net revenue by the three geographic regions we operate in and net
revenue from countries that represented 10% or more of our total net revenue (in millions, except percentage data) :
Net revenue:
Americas:
United States
Mexico
Other Americas
Total Americas
Asia-Pacific:
Hong Kong
Japan
South Korea
Other Asia-Pacific
Total Asia-Pacific
EMEA
Total net revenue
June 30, 2018
Years Ended
July 1, 2017
July 2, 2016
$
$
$
$
$
$
115.1
145.8
7.0
267.9
183.0
194.7
146.1
354.2
878.0
101.8
9.2% $
11.7
0.6
21.5% $
14.7% $
15.6
11.7
28.3
70.3% $
147.9
185.1
9.2
342.2
226.7
99.2
4.9
220.5
551.3
14.8% $
18.5
0.9
34.2% $
22.6% $
9.9
0.5
22.0
55.0% $
162.3
112.9
19.6
294.8
214.0
92.9
3.8
174.0
484.7
18.0%
12.5
2.2
32.7%
23.7%
10.3
0.4
19.2
53.6%
8.2% $
108.1
10.8% $
123.5
13.7%
1,247.7
$
1,001.6
$
903.0
During fiscal 2018 , 2017 and 2016 , net revenue generated from a single customer which represented 10% or greater of total net revenue is summarized as
follows:
Customer A
Customer B
Customer C
Customer D
*Represents less than 10% of total net revenue
June 30, 2018
Years Ended
July 1, 2017
July 2, 2016
30.0%
11.0%
11.0%
*
*
16.7%
18.5%
12.4%
*
17.1%
17.1%
13.0%
Long-lived assets, namely net property, plant and equipment were identified based on the physical location of the assets in the corresponding geographic
areas (in millions) :
Property, Plant and Equipment, net
United States
China
Thailand
Other countries
Total long-lived assets
102
As of
June 30, 2018
July 1, 2017
$
$
97.6 $
70.0
107.4
31.9
306.9 $
88.2
82.5
85.3
17.5
273.5
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In March 2017, we completed the purchase of a property in Thailand for additional manufacturing capacity of our future growth for approximately $9.9
million in cash. The building was valued at $5.5 million and the land was valued at $4.4 million . We are in the process of transitioning the manufacturing of our
products with one of our contract manufacturers in China to this Thailand manufacturing facility.
We purchase a substantial portion of our inventory from contract manufacturers and vendors located primarily in Taiwan, Thailand, and China. For the fiscal
years ended 2018 and 2017 , net inventory purchased from a single contract manufacturer which represented 10% or greater of total net purchases is summarized as
follows:
Vendor A
Vendor B
Vendor C
Vendor D
*Represents less than 10% of total net purchases
103
June 30, 2018
July 1, 2017
44.0%
20.0%
21.0%
*
50.0%
27.0%
*
14.0%
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LUMENTUM HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 20. Quarterly Financial Information (unaudited)
The following table presents our quarterly consolidated statements of operations for fiscal 2018 and 2017 ( in millions, except per share data ):
June 30, 2018
$
301.1 $
March 31,
2018
December 30,
2017
September 30,
2017
July 1, 2017 April 1, 2017
December 31,
2016
October 1,
2016
298.8 $
404.6 $
243.2 $
222.7 $
255.8 $
265.0 $
Net revenue
Cost of sales
Amortization of acquired developed
technologies
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Restructuring and related charges
Total operating expenses
Income from operations
Unrealized gain (loss) on derivative
liabilities
Interest and other income (expense), net
Income (loss) before income taxes
Provision for (benefit from) income taxes
204.8
201.0
232.7
173.9
154.0
172.0
176.3
0.8
95.5
38.5
32.7
3.4
74.6
20.9
7.8
(1.0)
27.7
(5.8)
0.8
97.0
38.2
33.2
0.1
71.5
25.5
(20.7)
(2.1)
2.7
—
0.8
171.1
43.8
35.7
0.8
80.3
90.8
7.9
(3.2)
95.5
(109.3)
0.8
68.5
36.3
26.6
2.9
65.8
2.7
4.2
(3.4)
3.5
(3.6)
1.4
67.3
35.4
26.0
2.0
63.4
3.9
(29.7)
(1.8)
(27.6)
27.3
1.7
82.1
37.3
28.1
3.1
68.5
13.6
(56.6)
(1.4)
(44.4)
11.6
1.7
87.0
38.7
31.0
4.0
73.7
13.3
4.8
(0.2)
17.9
6.1
Net income (loss)
$
33.5 $
2.7 $
204.8 $
7.1 $
(54.9) $
(56.0) $
11.8 $
258.1
174.7
1.7
81.7
36.9
25.1
2.9
64.9
16.8
(22.7)
0.2
(5.7)
(2.3)
(3.4)
Net income (loss) attributable to common
stockholders - Basic
Net income (loss) attributable to common
stockholders - Diluted
Net income (loss) per share attributable
to common stockholders (1) :
32.5
2.4
199.8
6.7
(55.2)
(56.2)
11.3
(3.6)
25.7
2.4
196.9
2.9
(55.2)
(56.2)
7.0
(3.6)
Basic
Diluted
$
$
0.52 $
0.40 $
0.04 $
0.04 $
3.21 $
3.05 $
0.11 $
(0.90) $
(0.92) $
0.04 $
(0.90) $
(0.92) $
0.19 $
0.11 $
(0.06)
(0.06)
Shares used to compute net income (loss)
per share attributable to common
stockholders:
Basic
Diluted
62.7
65.0
62.4
63.3
62.2
64.6
61.7
64.5
61.3
61.3
61.0
61.0
60.3
62.7
59.9
59.9
(1) We have reclassified certain prior period amounts to conform to current period presentation.
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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
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Management, with the participation of our
chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018 . The term
“disclosure controls and procedures,” as defined in Rules 13a-15 and 15d-15 under the Exchange Act, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2018 , our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were effective at a reasonable assurance level.
(b) MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the assessment,
management has concluded that its internal control over financial reporting was effective as of June 30, 2018 to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP.
Deloitte & Touche LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Form 10-K, has
issued a report, included herein, on the effectiveness of the Company’s internal control over financial reporting as of June 30, 2018 .
(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 and 15d-15 of the
Exchange Act that occurred during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Our management, including the CEO and CFO, recognizes that our disclosure controls and procedures or our internal control over financial reporting cannot
prevent or detect all possible instances of errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Lumentum Holdings Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Lumentum Holdings Inc. and subsidiaries (the “Company”) as of June 30, 2018, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018, based on criteria established
in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial
statements as of and for the year ended June 30, 2018, of the Company and our report dated August 28, 2018, expressed an unqualified opinion on those financial
statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management's Annual report on Internal control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
August 28, 2018
ITEM 9B. OTHER INFORMATION
None.
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PART III
The SEC allows us to include information required in this report by referring to other documents or reports we have already filed or will soon be filing. This is
called “incorporation by reference.” We intend to file our definitive proxy statement for our 2018 annual meeting of stockholders (the “Proxy Statement”) pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, and certain information to be contained therein is incorporated in
this report by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required for this Item is set forth in the Proxy Statement and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required for this Item is set forth in the Proxy Statement and incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required for this Item is set forth in the Proxy Statement and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required for this Item is set forth in the Proxy Statement and incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required for this Item is set forth in the Proxy Statement and incorporated herein by reference.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
1. Financial Statements
PART IV
The financial statements filed as part of this report are listed in the “Index to Financial Statements” under Part II, Item 8 of this report.
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations—Years Ended June 30, 2018, July 1, 2017, and July 2, 2016
Consolidated Statements of Comprehensive Income (Loss)—Years Ended June 30, 2018, July 1, 2017, and July 2, 2016
Consolidated Balance Sheets—June 30, 2018 and July 1, 2017
Consolidated Statements of Cash Flows—Years Ended June 30, 2018, July 1, 2017, and July 2, 2016
Consolidated Statements of Redeemable Convertible Preferred Stock, Stockholders’ Equity, and Invested Equity—Years Ended June 30, 2018, July 1,
2017, and July 2, 2016
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Page
53
55
56
57
58
59
60
62
The following additional financial statement schedules should be considered in conjunction with our consolidated 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 Consolidated Financial Statements or Notes thereto.
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Accounts receivable allowance:
Fiscal year ended June 30, 2018
Fiscal year ended July 1, 2017
Fiscal year ended July 2, 2016
Description
Deferred tax valuation allowance:
Fiscal year ended June 30, 2018
Fiscal year ended July 1, 2017
Fiscal year ended July 2, 2016
LUMENTUM HOLDINGS INC.
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at
Beginning
of Period
Increase (decrease) to
Income Statement
Write
Offs
Balance
at End of
Period
(in millions)
1.8 $
0.9 $
1.2 $
0.9 $
1.0 $
0.6 $
(in millions)
(0.1) $
(0.1) $
(0.9) $
2.6
1.8
0.9
Balance at Beginning of
Period
Additions Charged to
Expenses or Other
Accounts*
Deductions Credited to
Expenses or Other
Accounts**
Balance at End of Period
296.4 $
321.4 $
160.0 $
234.1 $
16.7 $
214.3 $
(431.1) $
(41.7) $
(52.9) $
99.4
296.4
321.4
$
$
$
$
$
$
* 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
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission.
Incorporated by Reference
Filed
Exhibit No.
Exhibit Description
2.1
2.1
2.2
3.1
3.2
4.1
4.2
4.3
10.1
Contribution Agreement
Agreement and Plan of Merger, dated as of March 11, 2018, by and
among Lumentum Holdings Inc., Oclaro, Inc., Prota Merger Sub,
Inc. and Prota Merger, LLC
Separation and Distribution Agreement
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Stockholder’s and Registration Rights Agreement
Indenture, dated March 8, 2017, between Lumentum Holdings Inc.
and U.S. Bank National Association
Form of 0.250% Convertible Senior Notes due 2024 (included in
Exhibit 4.2)
Tax Matters Agreement
Form
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
Exhibit
Filing Date
Herewith
2.1
2.1
2.2
3.1
3.2
4.1
4.1
4.2
10.1
8/6/2015
3/12/2018
8/6/2015
8/6/2015
8/6/2015
8/6/2015
3/9/2017
3/9/2017
8/6/2015
109
Table of Contents
10.2*
10.3
10.4
10.5
10.6*
10.6
10.7*
10.8*
10.9
10.10
10.11*
21.1
23.1
23.2
31.1
31.2
32.1†
32.2†
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Employee Matters Agreement
Intellectual Property Matters Agreement
2015 Equity Incentive Plan as amended
2015 Employee Stock Purchase Plan
Executive Officer Performance-Based Incentive Plan
Change in Control and Severance Benefits Plan, effective May 8,
2018
Employment Agreement for Alan Lowe
Form of Indemnification Agreement
Purchase Agreement, dated as of March 2, 2017, between Lumentum
Holdings Inc. and Goldman Sachs & Co., as representative of the
Initial Purchasers listed in Schedule I thereto.
Commitment Letter, dated as of March 11, 2018, by and among
Lumentum Holdings Inc., Deutsche Bank Securities Inc. and
Deutsche Bank AG New York.
Separation Agreement and General Release between Lumentum
Operations LLC and Aaron Tachibana dated July 31, 2018
Subsidiaries of Lumentum Holdings Inc.
Consent of Independent Registered Public Accounting Firm (Deloitte
& Touche LLP)
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.
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.
XBRL Instance
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation
8-K
8-K
8-K
S-8
8-K
8-K
10-K
8-K
8-K
10.2
10.3
10.2
99.2
10.3
10.4
10.8
8/6/2015
8/6/2015
11/9/2016
7/29/2015
11/9/2016
8/6/2015
9/25/2015
10.1
3/9/2017
10.1
3/12/2018
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
*Indicates management contract or compensatory plan or arrangement.
† The certifications furnished in Exhibits 32.1 and 32.2 that accompany this Amendment, are not deemed filed with the Securities and Exchange Commission and
are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, whether made before or after the date of this Amendment, irrespective of any general incorporation language contained in such filing.
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Table of Contents
ITEM 16. FORM 10-K SUMMARY.
None .
111
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 Annual Report to report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 28, 2018
LUMENTUM HOLDINGS INC.
/s/ Christopher W. Coldren
By: Christopher W. Coldren
Senior Vice President, Interim Chief Financial
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Christopher W. Coldren
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.
112
Table of Contents
/s/ ALAN LOWE
Alan Lowe
/s/ CHRISTOPHER W. COLDREN
Christopher W. Coldren
/s/ MATTHEW SEPE
Matthew Sepe
/s/ HAROLD COVERT
Harold Covert
/s/ JULIE JOHNSON
Julie Johnson
/s/ PENELOPE HERSCHER
Penelope Herscher
/s/ MARTIN KAPLAN
Martin Kaplan
/s/ BRIAN LILLIE
Brian Lillie
/s/ SAMUEL THOMAS
Samuel Thomas
Signature
Title
Date
President, Chief Executive Officer and Director (principal
executive officer)
August 28, 2018
Senior Vice President, Interim Chief Financial Officer (principal
financial officer)
August 28, 2018
Chief Accounting Officer (principal accounting officer)
August 28, 2018
Director
Director
Director
Chairman
Director
Director
113
August 28, 2018
August 28, 2018
August 28, 2018
August 28, 2018
August 28, 2018
August 28, 2018
LUMENTUM HOLDINGS INC.
CHANGE IN CONTROL AND SEVERANCE BENEFITS PLAN
AS AMENDED AND RESTATED
Exhibit 10.6
1.
Introduction .
This Lumentum Holdings Inc. (“ Company ”) Change in Control and Severance Benefits Plan (the “ Plan ”) is established effective April 14, 2015, as
amended and restated on May 8, 2018 (the “ Effective Date ”).
terminated in connection with or unrelated to a Change in Control (as defined below).
(a)
Purpose . The purpose of the Plan is to provide certain benefits to Eligible Executives (as defined below) whose employment is
(b)
Participants . Each Eligible Executive shall be a “ Participant ” in the Plan.
2.
Definition of Terms . The following capitalized terms used in this Plan shall have the following meanings:
(a)
“ Cause ” means (i) gross negligence or willful misconduct in the performance of a Participant’s duties to Employer; (ii) a material
and willful violation of any federal or state law by a Participant that if made public would injure the business or reputation of Employer; (iii) refusal or willful
failure by a Participant to comply with any specific lawful direction or order of Employer or the material policies and procedures of Employer, including but not
limited to Employer’s Code of Business Conduct and Inside Information and Securities Transactions policy, as well as any obligations concerning proprietary
rights and confidential information of Employer; (iv) conviction (including a plea of nolo contendere ) of a Participant of a felony, or of a misdemeanor that would
have a material adverse effect on Employer’s goodwill if such Participant were to be retained as an employee of Employer; or (v) substantial and continuing willful
refusal by a Participant to perform duties ordinarily performed by an employee in the same position and having similar duties as such Participant; in each case as
reasonably determined by the Committee or the Board of Directors of Company or Employer or the successor to Company or Employer.
(b)
“ Change in Control ” means the occurrence of one or more of the following with respect to Company:
the acquisition by any person (or related group of persons), whether by tender or exchange offer made directly to
Company’s stockholders, open market purchases or any other transaction or series of transactions, of stock of Company that, together with stock of Company held
by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the then outstanding stock of Company
entitled to vote generally in the election of the members of Company’s Board of Directors;
(i)
(ii)
a merger or consolidation in which Company is not the surviving entity, except for a transaction in which both (A)
securities representing more than fifty percent (50%) of the total combined voting power of the surviving entity are beneficially owned (within the meaning of Rule
13d-3 promulgated under the Securities Exchange Act of 1934), directly or indirectly, immediately after such merger or consolidation by persons who beneficially
owned Company common stock immediately prior to such merger or consolidation and (B) the members of Company’s Board of Directors immediately prior to
the transaction (the “ Existing Board ”) constitute a majority of the Board of Directors of the surviving entity or its parent entity immediately after such merger or
consolidation;
any reverse merger in which Company is the surviving entity but in which either (A) persons who beneficially owned,
directly or indirectly, Company common stock immediately prior to such reverse merger do not retain immediately after such reverse merger direct or indirect
beneficial ownership of securities representing more than fifty percent (50%) of the total combined voting power of Company’s outstanding securities or (B) the
members of the Existing Board do not constitute a majority of the Board of Directors of the Company’s parent entity immediately after such reverse merger; or
(iii)
disposition to one or more subsidiaries of Company).
(iv)
the sale, transfer or other disposition of all or substantially all of the assets of Company (other than a sale, transfer or other
Notwithstanding the foregoing, to the extent that any amount constituting nonqualified deferred compensation within the meaning of Section 409A of the
Internal Revenue Code (the “ Code ) (including any applicable final, proposed or temporary regulations and other administrative guidance promulgated
thereunder) would become payable under this Plan by reason of a Change in Control, such amount shall become payable only if the event constituting a Change in
Control would also constitute a change in ownership or effective control of Company or a change in the ownership of a substantial portion of the assets of
Company within the meaning of Section 409A of the Code.
(c)
“ Committee ” means the Compensation Committee of the Board of Directors of Company or a successor to Company.
intent to consummate a Change in Control and (ii) ending twelve (12) months following the consummation of such Change in Control, as applicable.
(d)
“ Coverage Period ” with respect to a Participant means the period (i) beginning upon the public announcement by Company of its
“ Disability ” means a mental or physical disability, illness or injury, evidenced by medical reports from a duly qualified medical
practitioner, which renders a Participant unable to perform any one or more of the essential duties of his or her position after the provision of reasonable
accommodation, if applicable, for a period of greater than ninety (90) days within a one-year period. “Disabled” has a corresponding meaning.
(e)
(f)
“ Eligible Executive ” means an individual employed by Company or any of its subsidiaries in the United States or Canada and on a
United States or Canada payroll who (i) is the Chief Executive Officer, (ii) is an Executive Vice President, (iii) is a Senior Vice President, (iv) is a Section 16
“Officer” within the meaning of 17 C.F.R. § 240.16a-1(f) or (v) is designated in writing by the Chief Executive Officer as being an Eligible Executive, subject to
subsequent review and ratification by the Committee at its discretion.
Participant, and each successor to Company or subsidiary of Company.
(g)
“ Employer ” with respect to a Participant means Company and each subsidiary of Company employing or formerly employing
following events with respect to such Participant:
(h)
“ Good Reason ” means a Participant’s resignation from Employer within ninety (90) days following the occurrence of any of the
without Participant’s express written consent, a material adverse change in Participant’s duties, authority, responsibilities,
job title or reporting relationships relative to Participant’s duties, authority, responsibilities, job title, or reporting relationships as in effect immediately prior to
such change in Participant’s duties, authority, responsibilities, job title, or reporting relationships; provided, however, that the occurrence of a Change in Control
shall not, in and of itself, constitute a material adverse change in Participant’s duties, authority, responsibilities, job title or reporting relationships;
(i)
(ii)
(iii)
reduction;
a material reduction by Employer in the base salary of Participant as in effect immediately prior to such reduction;
a material reduction by Employer in Participant’s annual bonus opportunity as in effect immediately prior to such
Participant’s then present principal work location, without Participant’s express written consent; or
(iv)
the relocation of Participant’s principal work location to a facility or a location more than fifty (50) miles from
the benefits provided for in this Plan, as it exists as the time of succession.
(v)
the failure of Company or Employer to obtain agreement from any successor contemplated in Section 6 below to provide
1(h), without regard to any alternate definitions thereunder) with Company, each subsidiary of Company, and each successor to Company.
(i)
“ Separation from Service ” means a separation from service (as such term is defined under Treasury Regulations Section 1.409A-
(j)
“ Termination Date ” means the date of a Participant’s Separation from Service.
3.
Eligibility for Severance and Other Benefits . Participants will receive the benefits described herein under the following circumstances:
(a)
Termination in Connection with a Change in Control . In the event of a Participant’s Separation from Service either by Employer
without Cause or by such Participant for Good Reason, in either case, at any time during the Coverage Period applicable to a Change in Control, then, conditioned
upon Participant’s execution and delivery of a release of claims against Company, Employer and related parties that releases Company, Employer and such parties
from any claims whatsoever arising from or related to Participant’s employment relationship with Employer, including the termination of that relationship, in a
form reasonably acceptable to Employer and Participant (the “ Release ”), and provided that any statutory revocation period has expired without the Release
having been revoked so that the Release becomes effective on or before the sixtieth (60th) day following the Termination Date (such 60th day being the “ Release
Deadline Date ”), Participant will receive the following:
(i)
Participant’s right, title and entitlement to any and all unvested Company equity-based awards that have been granted or
issued to Participant as of the Termination Date by Company (A) that are subject to time-based vesting conditions shall automatically be accelerated in full so as to
become immediately and completely vested, and (B) that are subject to performance-based vesting conditions with a “target” achievement level shall automatically
be accelerated at 100% of such “target” achievement level so as to become immediately and completely vested and fully exercisable. Such acceleration of vesting
and exercisability shall be effective upon the later of the Release Deadline Date or the consummation of the Change in Control.
Notwithstanding any other provision in the relevant equity incentive plan and/or notice of grant and grant agreement to the contrary, all such equity-based awards
which are stock options shall remain fully exercisable for the shorter of (a) two (2) years from the Termination Date, or (b) the remaining term of the stock option
as provided in the relevant notice of grant and grant agreement. In all other respects, Participant’s equity-based awards shall continue to be subject to the terms of
the applicable equity incentive plan, notice of grant and grant agreement.
a lump sum cash payment within ten (10) days following the later of the Release Deadline Date or the consummation of
the Change in Control in an amount equal to two (2) years’ salary at Participant’s base salary rate as of the Termination Date (without taking into account any
reduction in base salary that could trigger Participant’s resignation for Good Reason), less applicable withholding taxes or other withholding obligations of
Employer and less any amounts to which Participant is otherwise entitled under any statutory or Employer long-term or short-term disability plan; and
(ii)
(iii)
if Participant elects benefits continuation under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“ COBRA
”) following Separation from Service, payment of the full monthly cost of such benefits (either directly to Participant, including reimbursement for the cost of such
benefits paid by Participant prior to the commencement of Employer-paid benefits, or to the appropriate carrier or administrator at Employer’s election) for a
period of twelve (12) months following the Termination Date until such time as Participant becomes ineligible for continued benefits under COBRA (the period of
such payments the “ COC COBRA Payment Period ”), provided that , in the event Employer determines, in its sole discretion, that the payment of the COBRA
premiums pursuant to this subsection would result in a violation of the nondiscrimination rules of Section 105(h)(2) of the Code or any statute or regulation of
similar effect (including but not limited to the 2010 Patient Protection and Affordable Care Act, as amended by the 2010 Health Care and Education Reconciliation
Act), then in lieu of providing the COBRA premiums, Employer, in its sole discretion, may elect to instead pay such Participant on or before the first day of each
month of the COC COBRA Payment Period, a fully taxable cash payment equal to the COBRA premiums for that month, subject to applicable tax withholdings
(such amount, the “ COC Additional Severance Payment ”), for the remainder of the COBRA payment period. Such Participant may, but is not obligated to, use
such Additional Severance Payment toward the cost of COBRA premiums.
Voluntary Resignation; Termination for Cause . If a Participant’s employment terminates by reason of voluntary resignation (which
is not for Good Reason), or if a Participant is terminated for Cause, then such Participant shall not be entitled to receive any compensation or benefits under this
Plan.
(b)
(c)
Disability. If a Participant suffers from a Disability, Employer may terminate such Participant’s employment to the extent permitted
by law and, if such Separation from Service occurs within twelve (12) months following a Change in Control, then, subject to satisfaction of the Release conditions
described in Section 3(a) by Participant (or, in the event of Participant’s death or incapacity, Participant’s executor, representative or guardian, as applicable),
Employer will provide to Participant or Participant’s estate the compensation and benefits at the time and in the manner set forth in Section 3(a). For the avoidance
of doubt, in the event that Participant’s Separation from Service due to Participant’s Disability occurs at a time other than as described in the previous sentence,
Participant or Participant’s estate, as applicable, shall not be entitled to receive any compensation or benefits under the Plan.
(d)
Death . If a Participant’s employment is terminated due to the death of such Participant within twelve (12) months following a
Change in Control, then, subject to satisfaction of the Release conditions described in Section 3(a) by Participant’s executor or representative, Employer shall
provide to Participant’s estate the compensation and benefits at the time and in the manner set forth in Section 3(a). For the avoidance of doubt, in the event that
Participant’s Separation from Service due to Participant’s death occurs at a time other than as described in the previous sentence, Participant or Participant’s estate,
as applicable, shall not be entitled to receive any compensation or benefits under the Plan.
(e)
Termination Not in Connection With a Change in Control . In the event of a Participant’s Separation from Service either by
Employer without Cause or by such Participant for Good Reason, in either case, at any time outside the Coverage Period applicable to a Change in Control, then,
conditioned upon Participant’s execution and delivery of a Release, and provided that any statutory revocation period has expired without the Release having been
revoked so that the Release becomes effective on or before the Release Deadline Date, Participant will receive the following:
(i)
Participant’s right, title and entitlement to any and all unvested Company equity-based awards that have been granted or
issued to Participant as of the Termination Date by Company that are subject to time-based vesting conditions shall automatically be accelerated so that the number
of shares subject to such awards that would have vested over the 9-month period following the Termination Date will become immediately and completely vested
and exercisable. Such acceleration of vesting and exercisability shall be effective upon the Release Deadline Date. In all other respects, Participant’s equity-based
awards shall continue to be subject to the terms of the applicable equity incentive plan, notice of grant and grant agreement.
a lump sum cash payment within ten (10) days following the Release Deadline Date in an amount equal to nine (9) months
of Participant’s base salary rate as of the Termination Date (without taking into account any reduction in base salary that could trigger Participant’s resignation for
Good Reason), less applicable withholding taxes or other withholding obligations of Employer and less any amounts to which Participant is otherwise entitled
under any statutory or Employer long-term or short-term disability plan; and
(ii)
(iii)
if Participant elects benefits continuation under the COBRA following Separation from Service, payment of the full
monthly cost of such benefits (either directly to Participant, including reimbursement for the cost of such benefits paid by Participant prior to the commencement
of Employer-paid benefits, or to the appropriate carrier or administrator at Employer’s election) for a period of nine (9) months following the Termination Date
until such time as Participant becomes ineligible for continued benefits under COBRA (the period of such payments the “ Non-CIC COBRA Payment Period ”),
provided that , in the event Employer determines, in its sole discretion, that the payment of the COBRA premiums pursuant to this subsection would result in a
violation of the nondiscrimination rules of Section 105(h)(2) of the Code or any statute or regulation of similar effect (including but not limited to the 2010 Patient
Protection and Affordable Care Act, as amended by the 2010 Health Care and Education Reconciliation Act), then in lieu of providing the COBRA premiums,
Employer, in its sole discretion, may elect to instead pay such Participant on or before the first day of each month of the Non-CIC COBRA Payment Period, a fully
taxable cash payment equal to the COBRA premiums for that month, subject to applicable tax withholdings (such amount, the “ Non-CIC Additional Severance
Payment ”), for the remainder of the COBRA payment period. Such Participant may, but is not obligated to, use such Non-CIC Additional Severance Payment
toward the cost of COBRA premiums.
(f)
Coordination with Other Change in Control Benefits, Severance Benefits or Debts . If a Participant is entitled to cash payments,
accelerated vesting of equity-based awards, or any other benefits from Company or Employer following the termination of such Participant’s employment under
any other agreement, plan, policy or law, then the benefits received by that Participant under this Plan shall be reduced by the benefits received by Participant from
Company or Employer under such other plans, programs, arrangements, agreements or requirements. If a Participant is indebted to Company or Employer at the
time of a termination that would give rise to severance benefits under Section 3(a) or Section 3(e), as applicable, Company or Employer reserves the right to offset
such severance benefits under the Plan by the amount of such indebtedness (but only to the extent that such offset would not result in additional tax under Section
409A of the Code).
4.
At-Will Employment . Subject only to any individual written agreement between Employer and a Participant to the contrary, each
Participant’s employment is and shall continue to be at-will, as defined under applicable law. If a Participant’s employment terminates for any reason other than as
specified in Section 3, such Participant shall not be entitled to any benefits, damages, awards or compensation under this Plan.
5.
Tax Matters .
(a)
Section 409A . Payments and benefits that may be provided pursuant to this Plan are intended to be exempt from treatment as
deferred compensation subject to Section 409A of the Code by reason of the short-term deferral exception described in Treasury Regulation Section 1.409A-1(b)
(4), the involuntary separation pay plan exception described in Treasury Regulation Section 1.409A-1(b)(9)(iii), or otherwise. Notwithstanding any inconsistent
provision of this Plan, to the extent Employer determines in good faith that (a) one or more of the payments or benefits received or to be received by a Participant
pursuant to this Plan in connection with such Participant's termination of employment would constitute deferred compensation subject to the rules of Section 409A,
and (b) that Participant is a “specified employee” under Section 409A, then only to the extent required to avoid Participant's incurrence of any additional tax or
interest under Section 409A of the Code, such payment or benefit will be delayed until the date which is six (6) months after Participant's Separation from Service
(the “ Delayed Payment Date ”). All such amounts that would, but for this Section, become payable prior to the Delayed Payment Date will be accumulated and
paid in a lump sum on the Delayed Payment Date. Thereafter, any payments that remain outstanding as of the day immediately following the Delayed Payment
Date shall be paid without delay over the time period originally scheduled, in accordance with the terms of this Plan.
(b)
Section 280G . In the event that any payments or other benefits provided for in this Plan or otherwise to a Participant would (i)
constitute “parachute payments” within the meaning of Section 280G of the Code and (ii) become subject to the excise tax imposed by Section 4999 of the Code
(or any corresponding provisions of state tax law), then, notwithstanding the other provisions of this Plan, such Participant’s compensation and benefits under
Section 3 will not exceed the amount which produces the greatest after-tax benefit to Participant. For purposes of the foregoing, the greatest after-tax benefit will
be determined by Participant in his/her sole discretion on or before the later of thirty (30) days after the Termination Date or ten (10) days after the consummation
of the Change in Control. If no such determination is made by Participant within such period, then Company or Employer will pay the benefits as provided in
Section 3.
required to be withheld.
(c)
Tax Withholding . Employer may withhold from any amounts payable under the Plan such federal, state and local taxes as may be
6.
Company’s Successors . Company shall require that any successor to Company (whether direct or indirect and whether by purchase, merger,
consolidation, liquidation or otherwise) to all or substantially all of Company’s business and/or assets shall agree to perform in accordance with this Plan in the
same manner and to the same extent as Company would be required to perform such obligations in the absence of a succession.
7.
Exclusive Benefits . Participants shall not be entitled to any payments, compensation, benefits or other consideration from Company or
Employer, apart from those identified in Section 3, on account of a termination of employment as described therein.
8.
Severability, Enforcement . If any provision of this Plan, or the application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the remainder of this Plan and such provisions as applied to other persons, places and
circumstances shall remain in full force and effect.
9.
Claim for Benefits .
ERISA Plan . This Plan is intended to be (a) an employee welfare benefit plan as defined in Section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended (“ ERISA ”), and (b) a “top-hat” plan maintained for the benefit of a select group of management or highly
compensated employees of Company and its subsidiaries.
(a)
(b)
Application for Benefits . All applications for payments and/or benefits under the Plan (“ Benefits ”) shall be submitted to
Company’s Vice President, Human Resources (the “ Claims Administrator ”), with a copy to Company’s Chief Financial Officer. Applications for Benefits must
be in writing on forms acceptable to the Claims Administrator and must be signed by the Participant or beneficiary. The Claims Administrator reserves the right to
require the Participant or beneficiary to furnish such other proof of the Participant’s expenses, including without limitation, receipts, canceled checks, bills, and
invoices as may be required by the Claims Administrator.
(c)
Appeal of Denial of Claim .
denial within ninety (90) days after its submission. The notice shall be written in a manner calculated to be understood by the claimant and shall include:
(i)
If a claimant’s claim for Benefits is denied, the Claims Administrator shall provide notice to the claimant in writing of the
(A)
(B)
(C)
The specific reason or reasons for the denial;
References to the specific Plan provisions on which the denial is based;
A description of any additional material or information necessary for the applicant to perfect the claim and an
explanation of why such material or information is necessary; and
statement of claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination.
(D)
An explanation of the Plan’s claims review procedures and time limits applicable to such procedures, including a
the reason therefor shall be furnished to the claimant before the end of the initial ninety (90) day period. In no event shall such extension exceed ninety (90) days.
(ii)
If special circumstances require an extension of time for processing the initial claim, a written notice of the extension and
If a claim for Benefits is denied, the claimant, at the claimant’s sole expense, may appeal the denial to the Committee (the
“ Appeals Administrator ”) within sixty (60) days of the receipt of written notice of the denial. In pursuing such appeal the claimant or his or her duly authorized
representative:
(iii)
(A)
(B)
(C)
may request in writing that the Appeals Administrator review the denial;
may review pertinent documents; and
may submit issues and comments in writing.
(iv)
The decision on review shall be made within sixty (60) days of receipt of the request for review, unless special
circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than one hundred twenty
(120) days after receipt of the request for review. If such an extension of time is required, written notice of the extension shall be furnished to the claimant before
the end of the original sixty (60) day period. The decision on review shall be made in writing, shall be written in a manner calculated to be understood by the
claimant, and, if the decision on review is a denial of the claim for Benefits, shall include:
(A)
The specific reason or reasons for the denial;
(B)
(C)
References to the specific Plan provisions on which the denial is based;
A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and
copies of, the Plan and all documents, records and other information relevant to his or her claim for benefits; and
determination.
(D)
A statement of claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit
dispute arising under the Plan. As to such claims and disputes:
(d)
Exhaustion of Administrative Remedies . The exhaustion of these claims procedures is mandatory for resolving every claim and
No claimant shall be permitted to commence any legal action to recover benefits or to enforce or clarify rights under the
Plan under Section 502 or Section 510 of ERISA or under any other provision of law, whether or not statutory, until these claims procedures have been exhausted
in their entirety; and
(i)
determinations as to whether the claim, or a request for a review of a denied claim, was timely filed) shall be afforded the maximum deference permitted by law.
(ii)
In any such legal action, all explicit and implicit determinations by the Claims Administrator (including, but not limited to,
10.
General .
Administration . Except as otherwise specifically set forth in this Plan, the Committee has full discretionary authority to administer
and interpret this Plan, including (without limitation) discretionary authority to determine eligibility for benefits and the amount of benefits. Decisions of the
Committee made in good faith upon any matter within the scope of its authority shall be final, conclusive and binding upon all persons.
(a)
Unfunded Obligations . The amounts to be paid to Participants under the Plan are unfunded obligations of Company. Company is
not required to segregate any monies or other assets from its general funds with respect to these obligations. Participants shall not have any preference or security
interest in any assets of the Company other than as a general unsecured creditor.
(b)
or otherwise encumber, transfer, hypothecate or convey any amounts payable under the Plan prior to the date that such amounts are paid.
(c)
Benefits Not Assignable . Neither a Participant nor any other person shall have any right to sell, assign, transfer, pledge, anticipate
(d)
Clawback . Without the consent of any Participant, the obligations of Company to make a payment pursuant to this Plan shall be
subject to (i) the terms and conditions of a policy on the recoupment of incentive compensation as shall be adopted by Company to implement the requirements of
Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “ Dodd-Frank Act ”) or other mandate under law applicable to such
payment, or (ii) a determination by the Committee that an action with regard to such payment is appropriate after obtaining in connection with a Change in Control
a stockholder advisory vote required by Section 951 of the Dodd-Frank Act, or any successor provision, on golden parachute compensation arrangements, provided
that such payment is a subject of that advisory vote.
(e)
Notice . Notices and all other communications contemplated by this Plan shall be in writing and shall be deemed to have been duly
given either (i) when personally delivered or sent by facsimile or (ii) five (5) days after being mailed by U.S. registered or certified mail, return receipt requested
and postage prepaid. In the case of a Participant, mailed notices shall be addressed to him or her at the home address or facsimile number which he or she most
recently communicated to Employer in writing. In the case of Employer, mailed notices or notices sent by facsimile shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its General Counsel or Chief Financial Officer.
Participants. Upon a Change in Control, this Plan will become non-modifiable without the consent of the affected Participant(s).
(f)
Amendment. Prior to a Change in Control, Company reserves the right to amend or terminate this Plan upon written notice to
laws of the State of California without regard to conflicts of law principles.
(g)
Governing Law . To the extent not pre-empted by federal law, the Plan shall be construed in accordance with and governed by the
(c) Plan Termination. The Plan shall terminate on June 30, 2023 (the “ Plan Termination Date ”), provided that the Plan shall not terminate,
and shall continue in full force and effect and not shall not be terminable by any action of Company or a successor in interest to Company (i) in the event of the
occurrence of a Change in Control on or before the Plan Termination Date or (ii) with respect to any Participant whose Separation from Service occurs prior to a
Change in Control entitling such
Participant to severance benefits under Section 3(a) or Section 3(e), as applicable, and for which such severance benefits are not fully-paid as of the Plan
Termination Date.
11.
Execution . To record the adoption of the Plan as set forth herein, effective as of May 8, 2018, Lumentum Holdings Inc. has caused its duly
authorized officer to execute the same.
LUMENTUM HOLDINGS INC.
By: /s/ Judy Hamel
Name: Judy Hamel
Title: General Counsel and Secretary
Exhibit 10.11
J uly 31, 2018
Aaron Tachibana
C/O Lumentum Operations LLC
400 N. McCarthy Blvd.
Milpitas, CA 95035
Re:
Separation from Lumentum on September 30, 2018
Dear Aaron,
This letter agreement (“Agreement”) will confirm the terms of your separation from your employment with Lumentum Operations LLC and its parent,
subsidiaries and affiliated entities (the “Company”), which is expected to occur effective on September 30, 2018 (the “Termination Date”). The effective date of
this Agreement will be the 8 th calendar day following the date of your signature below (“Effective Date”). Capitalized terms will have the meaning ascribed to
them in the letter to which this Agreement is attached unless otherwise defined herein.
Upon your Qualifying Termination, you will be entitled to receive the payments and benefits set forth below subject to the terms and conditions set forth
below:
Pursuant to the Lumentum Holdings Inc. Change in Control and Severance Benefits Plan, as Amended and Restated (the “Severance Plan”), you will
receive the following, conditioned upon your execution, delivery, and non-revocation of this Agreement and the Supplemental Release attached hereto as Schedule
1, provided that you abide by the terms of this Agreement and execute the Supplemental Release no earlier than the Actual Termination Date, and no later than
twenty-one (21) days after the Actual Termination Date:
•
•
•
Time-Based Equity Awards : Any and all unvested Parent equity-based awards that are subject to time-based vesting conditions granted to you
prior to the date hereof (the “Time-Based Equity Awards”) will automatically be accelerated so that the number of shares subject to the Time-
Based Equity Awards that would have vested over the nine-month period following the Actual Termination Date will vest on the thirtieth (30th)
day following the Actual Termination Date (or if such thirtieth (30th) day following the Actual Termination Date falls on a weekend or holiday,
then the first business day after such thirtieth (30th) day) (the “Trigger Date”). Except as described herein, each Time-Based Equity Award will
remain subject to the terms and conditions of the award agreement and plan under which the Time-Based Equity Award was granted.
Cash Severance : Within ten days following the Trigger Date, you will receive a lump sum cash payment in the amount of $322,500, less
applicable withholdings, which is equal to nine (9) months of your base salary rate as of the Actual Termination Date.
COBRA Continuation . Upon the termination of your employment for any reason you will be eligible for continuation coverage under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”). A package containing appropriate COBRA information
will be mailed to you shortly after your Actual Termination Date by the third-party administrator that manages this program for the Company. If
you elect continuation coverage under COBRA following the Actual Termination Date, the Company will pay for the full monthly premium
costs of such benefits for a period of nine (9) months or until you are no longer eligible for COBRA benefits, whichever is sooner.
In addition to the benefits provided under the Severance Plan as described above, you will also receive the following, conditioned upon your execution,
delivery, and non-revocation of this Agreement and the Supplemental Release attached hereto as Schedule 1 , provided that you abide by the terms of this
Agreement and execute the Supplemental Release no earlier than the Actual Termination Date and no later than twenty one (21) days after the Termination Date:
•
PSU Awards : Any and all Parent equity awards that are subject to performance-based vesting conditions (the “PSU Awards”) for which the
performance-based conditions have not been satisfied as of the Effective Date will be achieved based on actual achievement of the applicable
performance metrics as determined by the compensation committee of Parent’s board of directors following the Actual Termination Date (the
“Achieved PSU Awards”) and such Achieved PSU Awards will automatically be accelerated so that the number of shares subject to the
Achieved PSU Awards that would have vested over the nine-month period following the Actual
Termination Date will vest on the Trigger Date. Except as described herein, the PSU Awards will remain subject to the terms and conditions of
the award agreement and plan under which the PSU Awards were granted.
Cash Incentive Plan : If unpaid as of your Actual Termination Date, you will receive a lump sum cash payment in an amount, less applicable
withholdings, which is equal to your target incentive opportunity under the Cash Incentive Plan (“CIP”) for the 2018 fiscal year, calculated at the
achievement level based on actual achievement of the applicable performance metrics for the 2018 fiscal year, which will be paid to you at the
same time as bonuses under the CIP are paid to the Company’s other senior executive officers participating in the CIP, but in no event later than
December 31, 2018.
Legal Fees: Within sixty (60) days after the Effective Date, the Company will reimburse you for your reasonable legal fees, not to exceed
$10,000, for advice in connection with preparing and finalizing this Agreement and related documents.
•
•
You acknowledge and agree that, other than the consideration set forth in this Agreement, the Company has paid or provided all salary, wages, bonuses,
accrued vacation/paid time off, premiums, leaves, housing allowances, relocation costs, interest, severance, outplacement costs, fees, reimbursable expenses,
commissions, equity awards, vesting, and any and all other benefits and compensation due to you; provided, however, that the Company will continue paying you
base salary at your current rate and providing benefits in which you participate through your Actual Termination Date.
Your Proprietary Information and Inventions Agreement signed on November 5, 2013 (the “Proprietary Agreement”), will continue in full force and
effect in accordance with its terms. You acknowledge and agree to continue to abide by the terms and conditions of the Company’s Insider Trading Policy in
accordance with its terms.
In consideration of the terms of this Agreement, you completely release from and agree not to file, cause to be filed, or otherwise pursue against the
Company, its affiliated, related, parent or subsidiary corporations, and its present and former directors, officers, employees, attorneys, insurers and affiliated
entities (collectively, the “Releasees”) from any claims, actions and causes of action, known or unknown, that you may now have, or at any other time had, or shall
or may have against these Releasees including claims arising from or related to your employment, the termination of your employment, or any other matter, cause,
fact, act or omission whatsoever occurring or existing at any time up to and including the date of execution of this Agreement, including, but not limited to, the
following: (i) claims arising under the federal or any state constitution; (ii) any and all claims for compensation (including bonus and severance payments), equity
awards or claimed rights related to equity awards, (ii) claims for breach of contract, wrongful termination, retaliation, fraud, misrepresentation, unfair business
practices, breach of fiduciary duty, defamation, infliction of emotional distress, invasion of privacy, personal injury, (iii) claims arising under any federal, state, or
local law, including, but not limited to, Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act (“ADEA”), the Worker
Adjustment and Retraining Notification (“WARN”) Act, the Americans with Disabilities Act, the Fair Labor Standards Act, the Equal Pay Act; the Fair Credit
Reporting Act; the Older Workers Benefit Protection Act; the Employee Retirement Income Security Act of 1974; the Family and Medical Leave Act; the
Sarbanes-Oxley Act of 2002; the Immigration Reform and Control Act; the California Family Rights Act; the California Labor Code; and the California Fair
Employment and Housing Act; (iv) any and all other claims arising from your employment relationship with and separation from the Company; and (v) any and all
claims for attorneys’ fees and costs.
Notwithstanding the previous paragraph, the parties acknowledge and agree that you are not releasing, and this release does not extend to (i) any
obligations of the Company under this Agreement, (ii) any claims that cannot be released as a matter of law, including, but not limited to, any Protected Activity
(as described below), or any claims that arise after your signing of this Agreement, (iii) any claims you might have under COBRA, (iv) your vested rights to any
benefits under applicable employee benefit plans, or (v) your rights to indemnification from the Company or any affiliates. Notwithstanding the foregoing, you
acknowledge that any and all disputed wage claims that are released herein shall be subject to binding arbitration as noted herein, except as required by applicable
law. You represent that you have made no assignment or transfer of any right, claim, complaint, charge, duty, obligation, demand, cause of action, or other matter
waived or released by this Section. The Company will maintain D&O insurance on your behalf to the same extent maintained on behalf of executive officers of the
Company.
You acknowledge that you are waiving and releasing any rights you may have under the ADEA and that this waiver and release is knowing and voluntary.
You have been advised that you have 21 calendar days to consider the terms of this Agreement (but may sign it at any time beforehand if you so desire), and that
you can consult an attorney in doing so. Nothing in this Agreement prevents or precludes you from challenging or seeking a determination in good faith of the
validity of this waiver and release under the ADEA, nor does it impose any condition precedent, penalties, or costs for doing so, unless specifically authorized by
federal law. You also understand that you can revoke your acceptance of the terms of this Agreement within seven calendar days of signing it by sending a certified
letter to that effect to the Company’s General Counsel. Notwithstanding the foregoing, you agree that the portion of this Agreement that pertains to the release of
claims under the ADEA shall not become effective or
enforceable until the seven calendar day revocation period has expired, but that all other terms of this Agreement will become effective upon your signature below.
You agree that this release specifically covers known and unknown claims and you waive your rights under Section 1542 of the California Civil Code or
under any comparable law of any other jurisdiction. Section 1542 states: ” A general release does not extend to claims which the creditor does not know or suspect
to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”
You agree to return all Company property, including, without limitation, all books, manuals, records, reports, notes, contracts, lists, blueprints, and other
documents, or materials, or copies thereof, and equipment furnished to or prepared by you in the course of or incident to your employment by the Actual
Termination Date. Further, subject to the language governing Protected Activity, you agree that you will not make or publish, either orally or in writing, any
disparaging statement regarding the Company or any other Releasee, including, without limitation, the business, products, intellectual property, financial standing,
future, or employment/compensation/benefit practices of the Company. In order to insure that there is no subsequent dispute regarding such potential impedance or
interference, you agree that for a period of one year after the Actual Termination Date you will not, for yourself or any third party, directly or indirectly employ,
solicit for employment, or recommend for employment any person who was employed by the Company as of the Actual Termination Date. The Company agrees
that its current directors and officers will not make any disparaging statements about you, either orally or in writing.
YOU AND THE COMPANY AGREE THAT ANY AND ALL DISPUTES ARISING OUT OF THE TERMS OF THIS AGREEMENT, YOUR
INTERPRETATION, AND ANY OF THE MATTERS HEREIN RELEASED, SHALL BE SUBJECT TO ARBITRATION IN SANTA CLARA COUNTY,
BEFORE JAMS, PURSUANT TO ITS EMPLOYMENT ARBITRATION RULES & PROCEDURES (“ JAMS RULES ”). THE ARBITRATOR MAY GRANT
INJUNCTIONS AND OTHER RELIEF IN SUCH DISPUTES. THE ARBITRATOR SHALL ADMINISTER AND CONDUCT ANY ARBITRATION IN
ACCORDANCE WITH CALIFORNIA LAW, INCLUDING THE CALIFORNIA CODE OF CIVIL PROCEDURE, AND THE ARBITRATOR SHALL APPLY
SUBSTANTIVE AND PROCEDURAL CALIFORNIA LAW TO ANY DISPUTE OR CLAIM, WITHOUT REFERENCE TO ANY CONFLICT-OF-LAW
PROVISIONS OF ANY JURISDICTION. TO THE EXTENT THAT THE JAMS RULES CONFLICT WITH CALIFORNIA LAW, CALIFORNIA LAW
SHALL TAKE PRECEDENCE. THE DECISION OF THE ARBITRATOR SHALL BE FINAL, CONCLUSIVE, AND BINDING ON THE PARTIES TO THE
ARBITRATION. YOU AND THE COMPANY AGREE THAT THE PREVAILING PARTY IN ANY ARBITRATION SHALL BE ENTITLED TO
INJUNCTIVE RELIEF IN ANY COURT OF COMPETENT JURISDICTION TO ENFORCE THE ARBITRATION AWARD. THE PARTIES TO THE
ARBITRATION SHALL EACH PAY AN EQUAL SHARE OF THE COSTS AND EXPENSES OF SUCH ARBITRATION, AND EACH PARTY SHALL
SEPARATELY PAY FOR ITS RESPECTIVE COUNSEL FEES AND EXPENSES; PROVIDED, HOWEVER, THAT THE ARBITRATOR SHALL AWARD
ATTORNEYS’ FEES AND COSTS TO THE PREVAILING PARTY, EXCEPT AS PROHIBITED BY LAW. YOU AND THE COMPANY HEREBY AGREE
TO WAIVE THEIR RIGHT TO HAVE ANY DISPUTE BETWEEN THEM RESOLVED IN A COURT OF LAW BY A JUDGE OR JURY.
NOTWITHSTANDING THE FOREGOING, THIS SECTION WILL NOT PREVENT EITHER YOU OR THE COMPANY FROM SEEKING INJUNCTIVE
RELIEF (OR ANY OTHER PROVISIONAL REMEDY) FROM ANY COURT HAVING JURISDICTION OVER THE PARTIES AND THE SUBJECT
MATTER OF THEIR DISPUTE RELATING TO THIS AGREEMENT AND THE AGREEMENTS INCORPORATED HEREIN BY REFERENCE. SHOULD
ANY PART OF THE ARBITRATION AGREEMENT CONTAINED IN THIS PARAGRAPH CONFLICT WITH ANY OTHER ARBITRATION
AGREEMENT BETWEEN YOU AND THE COMPANY, YOU AND THE COMPANY AGREE THAT THIS ARBITRATION AGREEMENT SHALL
GOVERN.
You understand and agree that, as a condition of this Agreement, you are not entitled to any future employment with the Company following the Actual
Termination Date, and you waive any right, or alleged right, of employment or re-employment with the Company. You further agree not to apply for employment
with the Company and not otherwise pursue an independent contractor or vendor relationship with the Company after the Actual Termination Date.
You understand that nothing in this Agreement will in any way limit or prohibit you from engaging for a lawful purpose in any Protected Activity. For
purposes of this Agreement, “Protected Activity” will mean filing a charge or complaint, or otherwise communicating, cooperating, or participating in any
investigation or proceeding that may be conducted by, any state, federal, or other governmental agency, including the Securities and Exchange Commission, the
Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, and the National Labor Relations Board (“Government
Agencies”). You understand that in connection with such Protected Activity, you are permitted to disclose documents or other information as permitted by law, and
without giving notice to, or receiving authorization from the Company. Notwithstanding the foregoing, you agree to take all reasonable precautions to prevent any
unauthorized use or disclosure of any information that may constitute Company confidential information under the Proprietary Agreement to any parties other than
the relevant Government Agencies. You further understand that “Protected Activity” does not include the disclosure of any Company attorney-client privileged
communications, and that any such disclosure without the Company’s written consent shall constitute a material breach of this
Agreement. In addition, pursuant to the Defend Trade Secrets Act of 2016, you are notified that an individual will not be held criminally or civilly liable under any
federal or state trade secret law for the disclosure of a trade secret that (a) is made in confidence to a federal, state, or local government official (directly or
indirectly) or to an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (b) is made in a complaint or other document filed
in a lawsuit or other proceeding, if (and only if) such filing is made under seal. In addition, an individual who files a lawsuit for retaliation by an employer for
reporting a suspected violation of law may disclose the trade secret to the individual’s attorney and use the trade secret information in the court proceeding, if the
individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.
This Agreement, along with the Proprietary Agreement, the Supplemental Release, any indemnification agreement with the Company, your
indemnification rights under the Company Bylaws and other indemnification agreements of the Company or under applicable law, and any plan or agreement
governing your Time-Based Equity Awards and PSU Awards (in either case, except as specifically amended herein) represents the entire agreement and
understanding between the Company and you concerning the subject matter of this Agreement and your employment with and separation from the Company and
the events leading thereto and associated therewith, and supersedes and replaces any and all prior agreements and understandings concerning the subject matter of
this Agreement and your relationship with the Company, including the Severance Plan (with the exception of Sections 5(b), 7, 9, and 10(d) thereunder).
Please confirm your acceptance of the foregoing by signing below and delivering your signed Agreement to me within 5 calendar days of the date hereof.
You and the Company acknowledge that you have been given twenty one (21) days to consider and sign this Agreement..
Sincerely,
/s/ Alan Lowe
Alan Lowe
President and Chief Executive Officer
Agreed and Accepted: Date:
/s/ Aaron Tachibana 7/31/2018
Aaron Tachibana
Schedule 1
SUPPLEMENTAL RELEASE
This Supplemental Release (“Supplemental Release”) is hereby executed by Aaron Tachibana (“Executive”) in favor of Lumentum Operations LLC
(“Lumentum” or the “Company”).
In consideration of the mutual promises, and consideration provided in the letter agreement regarding Executive’s separation from Lumentum, dated June
6, 2018 (the “Agreement”), Executive hereby verifies and confirms Executive’s renewed agreement to the terms of that Agreement, including, but not limited to,
the release and waiver of any and all claims relating to the services provided to the Company, and further extends such release and waiver to any claims that may
have arisen since the Effective Date of the Agreement, including, but not limited to, claims under any local ordinance or state or federal employment law, including
laws prohibiting discrimination in employment on the basis of race, sex, age, disability, national origin, or religion, as well as any claims for misclassification,
wrongful discharge, breach of contract, attorneys’ fees, costs, or any claims of amounts due for fees, commissions, expenses, salary, bonuses, profit sharing or
fringe benefits.
Notwithstanding the previous paragraph, Executive is not releasing, and this release does not extend to (i) any obligations of the Company under the
Agreement, (ii) any claims that cannot be released as a matter of law, including, but not limited to, any Protected Activity (as described in the Agreement), or any
claims that arise after Executive signs this Supplemental Release, (iii) any claims Executive might have under COBRA, (iv) Executive’s vested rights to any
benefits under applicable employee benefit plans, or (v) Executive’s rights to indemnification from the Company or any affiliates.
Executive acknowledges that the terms of the Agreement shall apply to this Supplemental Release and are expressly incorporated herein.
This Supplemental Release may not be signed earlier than September 30, 2018, which is the Executive’s Actual Termination Date (defined in the
Agreement). Beginning September 30, 2018, Executive has twenty one (21) days to consider and sign this Supplemental Release. This Supplemental Release will
become effective on the eighth (8th) day after Executive signs this Supplemental Release, so long as it has not been revoked by Executive before that date.
IN WITNESS WHEREOF, Executive has executed this Supplemental Release on the date set forth below.
Executive
Dated: ________________, 2018 __________ Aaron Tachibana
LIST OF SUBSIDIARIES
LUMENTUM HOLDINGS INC.
AS OF JUNE 30, 2018
Name of Entity
Exhibit 21.1
State or Other
Jurisdiction of
Incorporation or
Organization
DOMESTIC
CCOP International Holdings Inc.
E20 Communications Inc.
Lightwave Electronics Corporation
Lumentum Inc.
Lumentum Operations LLC
Lumentum Optical Corporation
Lumentum Research LLC
Prota Merger Sub, Inc.
Prota Merger, LLC
SDL PIRI, Inc.
INTERNATIONAL
Lumentum Asia Limited
Lumentum (BVI) Ltd
Lumentum Canada Ltd
Lumentum BC Research ULC
Lumentum Communication Technology (Shenzhen) Co., Ltd.
Lumentum International Tech Co.
Lumentum HoldCo Limited
Lumentum HoldCo Limited - Taiwan Branch
Lumentum International (Thailand) Co., Ltd.
Lumentum International (Thailand) Co., Ltd. - Branch
Lumentum Israel Ltd
Lumentum K.K.
Lumentum Netherlands B.V.
Lumentum Netherlands B.V. - France Branch
Lumentum Netherlands B.V. - Germany Branch
Lumentum Netherlands B.V. - Italy Branch
Lumentum Netherlands B.V. - UK Branch
Lumentum Ottawa Inc.
Lumentum SK Limited
Lumentum Switzerland AG
Lumentum Taiwan Co., Ltd.
Lumentum Tech LLC
Lumentum Technologies Limited
Lumentum d.o.o.
Delaware
Delaware
California
Delaware
Delaware
Massachusetts
Delaware
Delaware
Delaware
Delaware
Hong Kong
British Virgin Islands
Canada
Canada
China
Cayman Islands
Hong Kong
Taiwan
Thailand
Thailand
Israel
Japan
Netherlands
France
Germany
Italy
United Kingdom
Canada
South Korea
Switzerland
Taiwan
Cayman Islands
Canada
Slovenia
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-215937 and 333-205918 on Form S-8 of our reports dated August 28, 2018,
relating to the consolidated financial statements and consolidated financial statement schedule of Lumentum Holdings Inc. and subsidiaries (the “Company”), and
the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended
Exhibit 23.1
June 30, 2018.
/s/ Deloitte & Touche LLP
San Jose, California
August 28, 2018
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-215937 and 333-205918) of Lumentum Holdings Inc. of
our report dated September 2, 2016 relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K.
Exhibit 23.2
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 28, 2018
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 the 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - 15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) 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
d) 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: August 28, 2018
/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, Christopher W. Coldren, certify that:
1. I have reviewed the 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - 15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) 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
d) 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: August 28, 2018
/s/ CHRISTOPHER W. COLDREN
Christopher W. Coldren
Senior Vice President, Interim Chief Financial Officer
(Principal Financial 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 30, 2018 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.
Dated: August 28, 2018
/s/ ALAN LOWE
Alan Lowe
President and Chief Executive Officer
(Principal Executive Officer)
The foregoing certification is being furnished pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, and it is not to be incorporated by reference into any filing of Lumentum Incorporation, regardless of any general incorporation language in
such filing.
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 30, 2018 as filed with the Securities
and Exchange Commission (the “Report”), I, Christopher W. Coldren, Senior Vice President,
Interim 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.
Dated: August 28, 2018
/s/ CHRISTOPHER W. COLDREN
Christopher W. Coldren
Senior Vice President, Interim Chief Financial Officer
(Principal Financial Officer)
The foregoing certification is being furnished pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, and it is not to be incorporated by reference into any filing of Lumentum Incorporation, regardless of any general incorporation language in
such filing.