VIAVI SOLUTIONS INC. quarterly report, Q3 FY2013

Business context and reporting period

This is JDS Uniphase Corporation’s unaudited Form 10-Q for its fiscal third quarter ended March 30, 2013, and the nine months then ended. The filing identifies JDS Uniphase—not VIAVI Solutions—as the registrant; investors should verify the company and filing identity. JDSU reported three segments: Communications Test and Measurement (CommTest), Communications and Commercial Optical Products (CCOP), and Optical Security and Performance Products (OSP).

Financial results and liquidity

Amounts are in millions of dollars except per-share data.

MetricThree months ended Mar. 30, 2013Prior-year quarterNine months ended Mar. 30, 2013Prior-year period
Revenue$405.3$403.3$1,255.6$1,228.4
Gross profit / margin$155.3 / 38.3%$167.8 / 41.6%$516.9 / 41.2%$523.9 / 42.6%
Operating loss$(21.3)$(6.4)$(6.3)$(0.1)
Net loss$(28.0)$(17.4)$(35.5)$(33.4)
Net loss per share$(0.12)$(0.08)$(0.15)$(0.15)
Operating cash flowNot presented for quarterNot presented for quarter$130.7$81.8

At March 30, 2013, cash and cash equivalents were $257.7, short-term investments $350.4, and restricted cash $30.7, totaling $638.8. Current assets were $1,171.0 and current liabilities $501.2. Short-term debt was $159.6, comprising the remaining carrying amount of 1% Senior Convertible Notes; the $250 million revolving facility had no borrowings. The company reported compliance with debt covenants. Nine-month capital expenditures were $46.7.

Material changes versus comparable periods

  • Quarterly revenue rose 0.5%; nine-month revenue rose 2.2%. CCOP growth more than offset lower CommTest revenue; quarterly OSP revenue was slightly lower.
  • Quarterly gross margin fell 3.3 percentage points, primarily due to $11.3 of inventory charges and accelerated amortization associated with exiting low-speed wireline, plus pricing pressure in CommTest. Nine-month margin fell 1.4 points.
  • Quarterly operating loss widened to $21.3 from $6.4, and net loss widened to $28.0 from $17.4. For nine months, operating loss was $6.3 versus near break-even in the prior year, while net loss increased modestly.
  • CommTest quarterly revenue declined 2.0% and segment operating income fell to $13.0 from $20.1. CCOP revenue increased 3.5% and operating income rose to $19.2 from $14.1. OSP revenue declined 1.0% and operating income was broadly flat at $18.6.
  • Nine-month operating cash flow increased to $130.7 from $81.8. Cash and cash equivalents nevertheless declined $143.4, reflecting debt repurchases, acquisitions, capital spending, and investment purchases.
  • Short-term debt decreased from $292.8 at June 30, 2012, following $150.0 principal repurchases during the nine months. Goodwill increased to $114.8, primarily following acquisitions.

Outlook, management commentary, risks and unusual items

  • Management said existing cash, investments, and revolver availability should cover liquidity and capital needs, including repayment of the remaining $161.0 principal amount of convertible notes. After quarter-end, JDSU launched a tender offer to repurchase the notes at par, expiring May 15, 2013.
  • No formal revenue or earnings guidance is provided in the supplied filing text. Management expects R&D spending in dollars to increase in future quarters and estimated approximately $26.5 of annualized savings from restructuring actions initiated in the prior year.
  • Risks cited include uncertain demand, especially in Europe; pricing pressure and competition; customer concentration and procurement delays; product mix and seasonality; industry consolidation; and supply-chain, yield, quality, and cost risks from contract-manufacturing transitions. Management cautioned that these factors limit forecasting visibility.
  • JDSU acquired Arieso for approximately $89.6 cash and acquired GenComm for approximately $15.2; Arieso contributed only $0.4 of revenue and an estimated $2.2 net loss after acquisition, excluding acquisition costs. The company sold its Hologram Business for $11.5 gross proceeds, recognizing a $0.6 gain; a contingent earn-out of up to $4.0 was not recognized.
  • The low-speed wireline exit caused $11.3 of inventory charges and $2.2 of accelerated intangible amortization in the quarter. A separate CPV product-line exit had generated $2.6 accelerated amortization earlier in the fiscal year.
  • The company recorded out-of-period adjustments that reduced nine-month net loss by $2.5; management and the Audit Committee concluded the errors were not material to prior-year statements or expected to be material to fiscal 2013 full-year statements.
  • Other exposures include $61.1 of unrecognized tax benefits and $24.3 accrued for tax interest and penalties; an $89.9 pension underfunding; ordinary-course legal claims; and guarantees for which maximum exposure could not be reasonably estimated. A Texas tax audit matter was settled for $0.1. Management reported effective disclosure controls and no material change in internal control during the quarter.

Important facts for investors to verify

  1. Confirm the registrant and reporting-period mapping: the supplied filing is JDS Uniphase’s fiscal Q3 2013 10-Q, not a filing titled VIAVI Solutions.
  2. Review the remaining convertible-note repurchase outcome and its effect on cash, liquidity, and debt after May 15, 2013.
  3. Assess whether CCOP growth and restructuring savings can offset CommTest weakness, lower gross margin, and the costs of product-line exits.
  4. Evaluate the quality and sustainability of operating cash flow, including working-capital movements and continuing capital and acquisition spending.
  5. Monitor acquisition integration, customer demand and concentration, supply-chain transitions, tax exposures, pension obligations, and legal contingencies.