Business context and reporting period
This is JDS Uniphase Corporation’s unaudited Form 10-Q for the quarter ended October 1, 2011, the first quarter of fiscal 2012. The filing describes communications test and measurement, communications and commercial optical products, and advanced optical technologies businesses. The company name in the filing is JDS Uniphase Corporation; it is not identified in the filing as VIAVI Solutions Inc.
Financial performance
| Metric | Quarter ended Oct. 1, 2011 | Prior-year quarter |
|---|---|---|
| Revenue | $420.8 million | $405.2 million |
| Gross profit / margin | $182.6 million / 43.4% | $173.3 million / 42.8% |
| Operating income | $3.2 million | $0.8 million |
| Net income (loss) | $(5.8) million | $0.1 million |
| Diluted earnings (loss) per share | $(0.03) | $0.00 |
| Cash provided by operating activities | $22.9 million | $35.7 million |
Operating expenses included $59.8 million of research and development, $111.2 million of selling, general and administrative expense, and $1.5 million of restructuring charges. Interest expense was $6.6 million; income tax expense was $3.4 million despite a pretax loss.
Balance sheet and liquidity
At October 1, 2011, cash and cash equivalents were $366.9 million, short-term investments $320.0 million, and restricted cash $36.4 million. Current assets were $1.267 billion and current liabilities $366.0 million. Long-term debt was $290.7 million; stockholders’ equity was $1.065 billion. Management stated existing cash and investments were expected to meet liquidity and capital spending needs for at least 12 months.
Cash and cash equivalents declined $28.5 million during the quarter. Investing activities used $48.2 million, including $21.2 million for property and equipment and $3.7 million for the QuantaSol asset acquisition. Financing activities used $0.1 million. The company reported $723.3 million in cash, cash equivalents, short-term investments, and restricted cash combined.
Changes versus the prior-year quarter
- Revenue rose 3.8%, led by CCOP and CommTest; AOT revenue declined.
- Gross margin improved 0.6 percentage points, while operating income increased to $3.2 million.
- The company moved from slight net income to a $5.8 million net loss, reflecting, among other items, higher tax expense.
- Operating cash flow fell to $22.9 million from $35.7 million, with working-capital uses including higher inventory and lower accrued payroll, accounts payable, and deferred revenue.
CommTest revenue was reported as $184.9 million in MD&A and $185.2 million in the segment note; the latter shows a separate $(0.3) million purchase-accounting deferred-revenue adjustment to arrive at consolidated revenue.
Outlook, risks and unusual items
- Management expected a significant negative impact on CCOP revenue in fiscal 2012’s second quarter because flooding in Thailand suspended operations at a key contract manufacturer. The facility had not been breached, but the timing of restart and return to full production was uncertain.
- Management cited pricing pressure, customer concentration, Asia-based competition, product-mix and manufacturing-utilization variability, seasonality, and customer consolidation as risks to revenue and margins. No specific consolidated revenue or earnings guidance was provided.
- Restructuring actions were expected to produce approximately $29 million in annual cost savings. First-quarter charges were $1.5 million; restructuring accruals totaled $8.4 million.
- The company accrued $7.4 million, including interest, for an unfavorable arbitration decision and intended to continue litigating to set it aside.
- A Texas franchise tax audit could result in $0 to $34.2 million of additional tax liability, plus interest and penalties; management did not expect a material adverse effect based on information then available.
- The $290.7 million carrying amount of 1% senior convertible notes was due in 2026; holders had specified put rights beginning in 2013. The company reported compliance with debt covenants and had $40.2 million of standby letters of credit.
- Pension plans were underfunded by $80.8 million; management estimated $5.2 million of fiscal 2012 pension cash outlays. The company also disclosed investment, foreign-exchange, supplier, and sublease-related risks.
Most important facts for investors to verify
- Whether the Thailand contract manufacturer resumed production and the actual second-quarter CCOP revenue impact.
- Subsequent revenue, margins, and cash conversion, particularly inventory and deferred-revenue trends.
- Resolution and cash consequences of the arbitration award and Texas tax audit.
- Progress toward the stated $29 million annual restructuring savings and any additional restructuring costs.
- Convertible-note put terms, pension funding requirements, and the availability of unrestricted liquidity.