Business context and reporting period
This is JDS Uniphase Corporation’s unaudited Form 10-Q for the quarter ended December 28, 2013, the second quarter of fiscal 2014, and the six months then ended. The filing describes JDSU, not a company identified in the filing as VIAVI SOLUTIONS INC. Its businesses are Network and Service Enablement (NSE), Communications and Commercial Optical Products (CCOP), and Optical Security and Performance Products (OSP).
Financial performance and position
| Metric | Three months ended Dec. 28, 2013 | Year-ago quarter | Six months ended Dec. 28, 2013 | Year-ago six months |
|---|---|---|---|---|
| Revenue | $447.6 million | $429.4 million | $876.6 million | $850.3 million |
| Gross profit / margin | $204.9 million / 45.8% | $189.0 million / 44.0% | $390.1 million / 44.5% | $361.6 million / 42.5% |
| Operating income | $19.8 million | $14.9 million | $26.4 million | $15.0 million |
| Net income (loss) | $8.8 million | $4.1 million | $9.1 million | $(7.5) million |
| Diluted EPS | $0.04 | $0.02 | $0.04 | $(0.03) |
- Revenue rose 4.2% for the quarter and 3.1% for the six-month period. Gross margin improved, which management attributed mainly to lower acquired-technology amortization and better CCOP manufacturing yields; a higher CCOP revenue mix partly offset the improvement.
- Quarterly consolidated operating margin was approximately 4.4%, versus 3.5% a year earlier; six-month operating margin was approximately 3.0%, versus 1.8%. These percentages are calculated from reported operating income and revenue.
- Segment results for the quarter: NSE revenue was $195.0 million and operating income $28.7 million; CCOP revenue was $198.0 million and operating income $23.9 million; OSP revenue was $54.6 million and operating income $20.5 million. NSE operating margin declined to 14.7% from 18.1%; CCOP rose to 12.1% from 11.4%; OSP rose to 37.5% from 33.6%.
- Six-month operating cash flow was $83.9 million, down from $102.5 million. Capital expenditures were $44.3 million; operating cash flow less capital expenditures was approximately $39.6 million. Cash and cash equivalents ended at $473.4 million.
- At quarter-end, short-term investments were $592.0 million and restricted cash $30.2 million. Cash, short-term investments and restricted cash totaled $1,095.6 million, up $579.7 million from June 29, 2013.
- Long-term debt was $524.2 million carrying value; the related convertible notes have $650.0 million principal and mature in 2033. The notes carry a 0.625% coupon, but the filing reports a 5.4% effective interest rate reflecting discount accretion. The company reported compliance with debt covenants and no debt at June 29, 2013. Current assets were $1,623.8 million and current liabilities $379.8 million.
Material changes versus comparable periods
- CCOP drove much of the revenue growth, including demand for gesture-recognition light sources and circuit packs. NSE quarterly revenue was nearly flat, while OSP grew, partly due to customer last-time purchases ahead of product exits.
- NSE operating income and margin weakened despite slightly higher six-month revenue, reflecting higher headcount and R&D investment, including costs associated with acquisitions. CCOP and OSP operating margins improved.
- R&D expense rose 13.9% in the quarter and 13.4% for six months; SG&A increased 3.4% and 2.9%, respectively. Acquired-technology amortization fell as certain intangible assets became fully amortized.
- Operating cash flow declined year over year, partly reflecting a $28.3 million increase in accounts receivable. Financing cash flow included $650.0 million of convertible-note proceeds and a $100.0 million share repurchase of 7.4 million shares.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said it expects R&D investment in dollar terms to increase in future quarters, intends to reduce SG&A as a percentage of revenue, and estimated approximately $22.4 million in annualized savings from restructuring activities initiated in the prior year.
- Management said existing cash and investments should cover liquidity and capital spending needs for the next 12 months. It cautioned that demand and results may vary due to uncertain European conditions, customer concentration, pricing pressure and competition, product mix, seasonality, and consolidation among communications customers.
- Trendium assets were acquired for an initial $24.9 million in cash in December 2013; the purchase-price allocation was preliminary. After quarter-end, the company acquired Network Instruments for $200.0 million and Time-Bandwidth Products for $15.0 million in cash, subject to adjustments and holdbacks. Purchase-price allocations were not yet available.
- Restructuring accruals were $12.0 million at quarter-end. Plans include workforce reductions and facility/product-line changes; savings and lease-exit estimates depend partly on sublease income and commercial real-estate conditions.
- Unrecognized tax benefits were $81.1 million, with $24.6 million accrued for interest and penalties; approximately $22.3 million of unrecognized benefits may be recognized within 12 months. Ordinary-course legal claims were disclosed, with outcomes uncertain; management did not expect a material adverse effect based on its current assessment.
- The quarter included a $1.7 million prior-period tax adjustment reducing tax expense. A prior-year out-of-period adjustment reduced the September 2012 quarter’s net loss by $1.9 million; management said it was not material to prior-year statements or fiscal 2013 overall.
Important facts for investors to verify
- Confirm the issuer and reporting period: the supplied filing is JDS Uniphase Corporation’s fiscal 2014 second-quarter 10-Q.
- Review the terms, conversion provisions and potential dilution or cash settlement exposure of the $650.0 million principal amount of 2033 convertible notes.
- Assess the cash impact and integration risks of the two post-quarter acquisitions, particularly the $200.0 million Network Instruments purchase.
- Track whether NSE margins recover and whether management’s R&D, restructuring-savings and cost-control expectations are achieved.
- Monitor receivables, operating cash flow, customer concentration, product-transition demand, and the company’s tax and legal contingencies.