JDS Uniphase Corporation (JDSU) — Form 10-Q Summary
Filing identity and period: The supplied filing is for JDS Uniphase Corporation, not VIAVI Solutions Inc. It covers the quarter ended December 29, 2012—the second quarter of JDSU fiscal 2013—and the six-month period then ended. Financial statements are unaudited; amounts are in millions except per-share data.
Business context
JDSU reported three segments: Communications Test and Measurement (CommTest), Communications and Commercial Optical Products (CCOP), and Optical Security and Performance Products (OSP). It provides network testing, optical communications and laser products, and anti-counterfeiting and optical security products.
Financial performance
| Metric | Three months ended Dec. 29, 2012 | Six months ended Dec. 29, 2012 |
|---|---|---|
| Revenue | $429.4; up 4.9% year over year | $850.3; up 3.1% |
| Gross profit / margin | $189.0 / 44.0%, versus 42.6% | $361.6 / 42.5%, versus 43.2% |
| Operating income | $14.9, versus $0.9 | $15.0, versus $6.3 |
| Continuing-operations income (loss), net of tax | $3.3, versus $(7.7) | $(6.5), versus $(11.3) |
| Net income (loss), including discontinued operations | $4.1, versus $(10.2) | $(7.5), versus $(16.0) |
| Diluted earnings (loss) per share | $0.02, versus $(0.04) | $(0.03), versus $(0.07) |
Quarterly revenue growth was led by CCOP, up 13.8% to $185.8; CommTest was nearly flat at $195.4, and OSP declined 4.0% to $48.2. For the six months, CCOP rose 10.8% to $380.7 and OSP rose 3.9% to $104.7, while CommTest fell 4.2% to $364.9. Quarterly gross-margin improvement reflected CommTest efficiencies and product mix; the six-month margin decline reflected a greater CCOP revenue mix and $0.8 of inventory write-off and $2.6 of accelerated amortization associated with ending the CPV product line.
Research and development expense increased 7.8% to $63.5 for the quarter and 5.8% to $125.1 for six months. SG&A was essentially flat at $105.4 quarterly and fell 2.6% to $210.1 for six months. Segment operating margins for the quarter were 18.1% CommTest, 11.4% CCOP and 33.6% OSP.
Cash flow, debt and liquidity
- Six-month operating cash flow was $102.5, versus $68.6 a year earlier. Investing activities used $115.8 and financing activities used $85.4. Cash and cash equivalents decreased $95.6 to $305.5.
- Cash, short-term investments and restricted cash totaled $740.2 at December 29, 2012, down $12.5 from June 30, 2012. The filing says cash and available credit are expected to meet liquidity and capital-spending needs.
- Short-term debt was $205.6, down from $292.8 at June 30, following repurchases of $100.0 principal amount of 1% Senior Convertible Notes during the first half. The remaining principal was $211.0; it was classified as short-term because holders could require repurchase in May 2013. A further $50.0 principal repurchase occurred January 2, 2013.
- The $250.0 revolving credit facility had no borrowings at quarter end. It is secured and includes financial covenants and a requirement to maintain at least $200.0 of cash and permitted investments in controlled accounts. JDSU reported covenant compliance. It also had 15 standby letters of credit totaling $34.5.
Material changes, outlook and risks
- Management attributed quarterly revenue growth partly to recovery from Thailand flooding that had reduced prior-year CCOP revenue by about $15, and to higher CCOP product volumes. CCOP benefited from new product ramps; CommTest faced customer procurement delays and weaker spending, particularly in Europe and North America.
- JDSU sold its Hologram Business on October 12, 2012 for gross proceeds of $11.5 and recorded a $0.6 gain. Results were presented as discontinued operations. A possible additional earn-out of up to $4.0 depends on revenue performance during the one-year period after closing.
- Restructuring charges were $3.0 for the quarter and $5.7 for six months; management estimated approximately $23.1 of annualized savings from restructuring initiated in the prior year. Actions included CommTest workforce reductions and outsourcing and termination of the CCOP CPV product line.
- The filing gives no specific numerical revenue or earnings guidance. Management cautioned that demand and results remain difficult to predict because of macroeconomic uncertainty, pricing pressure and competition, customer concentration and consolidation, seasonality, product mix, and risks from contract-manufacturing transitions. It also identified investment-market, foreign-exchange, pension-funding and liquidity risks.
- Contingencies include a Texas tax audit with a potential liability range of $0 to $34.2, plus interest and penalties; unrecognized tax benefits of $62.6; and $24.5 accrued for tax interest and penalties. JDSU also disclosed possible rescission payments of up to approximately $5.7 related to unregistered ESPP shares, and possible regulatory penalties; it said it did not expect a material financial-statement impact.
- An out-of-period adjustment recorded in the first quarter of fiscal 2013, primarily for prior-year cost of sales, reduced that quarter’s net loss by $1.9. Management stated it was not material to prior-year statements or expected to be material to fiscal 2013. The filing also reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer and reporting period: this document identifies JDS Uniphase Corporation and fiscal Q2 2013, not VIAVI Solutions Inc. or calendar Q2 2012.
- Track repayment or refinancing of the remaining convertible-note principal and the effect of the January 2013 repurchase.
- Assess whether CommTest demand stabilizes and whether CCOP growth and gross-margin performance persist as product mix and customer programs change.
- Monitor restructuring savings against execution costs, manufacturing-transition risks, and the CPV exit.
- Follow the Texas tax audit, ESPP rescission offer, and any Hologram Business earn-out; the filing does not establish their ultimate outcomes.