Filing summary
Period and issuer: This filing is JDS Uniphase Corporation’s Form 10-Q for fiscal Q3 2015, the three and nine months ended March 28, 2015, compared with periods ended March 29, 2014. The supplied “2014 Q3” metadata does not match the filing period. JDSU said it planned to rename the network and service enablement company Viavi Solutions Inc. upon a proposed separation; JDSU is the issuer in this filing.
JDSU operated four reportable segments: Network Enablement (NE), Service Enablement (SE), Communications and Commercial Optical Products (CCOP), and Optical Security and Performance Products (OSP). The statements are unaudited.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $410.7 million | $418.0 million | $1,281.4 million | $1,294.6 million |
| Gross profit / margin | $184.3 million / 44.9% | $184.7 million / 44.2% | $584.1 million / 45.6% | $574.8 million / 44.4% |
| Operating income (loss) | $(22.3) million | $(11.6) million | $(26.3) million | $14.8 million |
| Net income (loss) | $(13.2) million | $(1.5) million | $(48.0) million | $7.6 million |
| Diluted EPS | $(0.06) | $(0.01) | $(0.21) | $0.03 |
Consolidated operating margin was approximately negative 5.4% in Q3 versus negative 2.8% a year earlier; for nine months it was negative 2.1% versus positive 1.1%. Operating expenses rose, including higher R&D, SG&A, amortization and restructuring costs. The nine-month result also included increased separation-related expenses.
Segment revenue and operating results: Q3 revenue was NE $128.1 million (down 5.8% year over year), SE $39.0 million (up 7.4%), CCOP $195.2 million (up 0.3%) and OSP $48.4 million (down 5.3%). Segment operating income (loss) was NE $25.8 million, SE $(9.5) million, CCOP $17.4 million and OSP $19.1 million. For the nine months, revenue changes were NE down 9.7%, SE up 29.9%, CCOP up 2.4% and OSP down 10.1% year over year.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $34.5 million, down from $126.4 million. Capital expenditures were $68.7 million; operating cash flow less capital expenditures was negative $34.2 million.
- Cash and cash equivalents were $299.2 million, short-term investments $489.7 million and restricted cash $26.6 million at March 28, 2015. These combined balances totaled $815.5 million, down $65.8 million from June 28, 2014.
- Current assets were $1,356.9 million and current liabilities $336.0 million, yielding working capital of $1,020.9 million. The filing states management believed existing cash and investments would meet liquidity and capital spending needs for the next 12 months.
- Long-term debt had a $555.2 million carrying value; principal on the 0.625% convertible notes due 2033 was $650.0 million. The notes’ stated coupon is 0.625%, while the effective interest rate is 5.4% due to discount accretion. The company reported compliance with debt covenants. It also had 11 standby letters of credit totaling $30.0 million.
- Stockholders’ equity was $1,119.1 million, down from $1,187.7 million at June 28, 2014. Foreign-currency translation reduced other comprehensive income by $63.0 million over the nine months.
Material changes and management commentary
- Revenue fell 1.7% in Q3 and 1.0% for the nine-month period. Management cited weaker NE demand, including carrier spending reductions, and lower OSP legacy-product and 3D-sensing revenue. SE growth reflected Enterprise and Location Intelligence, while CCOP benefited from Datacom and laser products; lower 3D-sensing demand partly offset those gains.
- Gross margin improved year over year, attributed to product mix, higher-margin software and maintenance, anti-counterfeiting revenue, and the exit from lower-margin legacy products. Management cautioned that customer concentration, pricing pressure, product mix and industry transitions may continue to make margins variable.
- Management expected R&D spending in dollar terms to increase in future quarters. It estimated annualized cost eliminations of approximately $53 million from restructuring activities, while expecting significant additional restructuring and separation-related charges during the remainder of FY2015.
- The proposed separation was expected by calendar Q3 2015, through a tax-free pro rata spinoff of CCOP as Lumentum, with JDSU’s remaining businesses becoming Viavi. The structure remained subject to change and completion conditions.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management warned that demand, profitability and results could remain difficult to predict, citing foreign-exchange movements, weak or uncertain demand in Europe, pricing and competitive pressure, customer concentration, product mix, customer buying patterns and industry consolidation. It anticipated lower 3D-sensing demand through FY2015 versus FY2014.
- Separation-related expenses were $16.2 million in Q3 and $32.9 million for nine months, including restructuring, professional fees and additional personnel costs. The separation restructuring plan affected approximately 220 employees; a separate CCOP site closure plan affected approximately 30 employees.
- The company recorded a $17.4 million income tax benefit in Q3 and a $2.5 million benefit for nine months. A $21.8 million benefit from settlement of a non-U.S. tax audit was a significant component. Unrecognized tax benefits were $38.3 million at quarter-end.
- Other items included a $1.9 million impairment of acquired in-process R&D for nine months and $6.3 million of incremental stock-based compensation associated with changes to executive change-of-control awards.
- Pension plans were underfunded by $86.5 million; the company also reported a $1.1 million non-pension post-retirement liability. Ordinary-course legal claims were described as not expected by management to have a material adverse effect, although outcomes remain uncertain.
- Risks to the separation included delay or failure to complete, higher-than-expected costs, customer or employee disruption, and potential tax liability if the spinoff did not qualify as tax-free. Management said the separation required board approval, tax opinions, an effective registration statement and regulatory requirements.
Investor verification points
- Confirm the filing period and issuer identity: this is JDSU FY2015 Q3, not a 2014 Q3 Viavi filing.
- Track the separation’s completion conditions, timing, total costs, tax treatment and any changes to the proposed transaction structure.
- Assess whether NE and OSP revenue weakness and lower 3D-sensing demand persist, and whether SE and CCOP growth offsets them.
- Monitor operating cash flow, working-capital movements, restructuring cash payments and the gap between reported profit and cash generation.
- Review the $650 million convertible-note principal, pension funding obligations, tax exposures and any material developments in legal contingencies.