VIAVI Solutions Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended October 3, 2020. This was a 14-week quarter, compared with 13 weeks in the prior-year period ended September 28, 2019; results may not be directly comparable. Financial statements are unaudited.
Business context and financial performance
VIAVI provides network test, monitoring and assurance solutions and optical products. Its reportable businesses are Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP). Amounts below are in millions except per-share data.
| Metric | Q1 FY2021 | Prior-year quarter |
|---|---|---|
| Revenue | $284.7 | $299.8 |
| Gross profit / margin | $169.4 / 59.5% | $174.4 / 58.2% |
| Operating income | $31.3 | $20.7 |
| Net income | $14.3 | $6.8 |
| Diluted EPS | $0.06 | $0.03 |
| Operating cash flow | $63.9 | $31.3 |
| Capital expenditures | $8.0 | $7.1 |
Revenue declined 5.0% year over year, while gross margin increased 1.3 percentage points. Operating expenses fell to $138.1 from $153.7, including lower SG&A and R&D. Management attributed lower SG&A largely to reduced sales commissions, travel and entertainment spending. Interest expense was $9.0; income-tax provision was $8.6.
Material changes versus the prior comparable period
- NE: Revenue decreased 18.5% to $162.1, primarily reflecting COVID-19-related effects on Field Instruments, including Cable, Access and AvComm products. Segment operating margin for combined Network and Service Enablement fell to 7.2% from 10.1%.
- SE: Revenue increased 2.4% to $21.4; gross margin rose to 66.8% from 60.3%, helped by favorable mix in Assurance growth products.
- OSP: Revenue increased 26.5% to $101.2, with growth across anti-counterfeiting, 3D Sensing, and Aerospace & Defense. Gross margin rose to 60.3% from 54.1%; operating margin rose to 46.7% from 38.0%, reflecting higher volume and better manufacturing cost absorption.
- Operating cash flow more than doubled, supported in part by strong receivables collections. Cash from operations less capital expenditures was approximately $55.9.
- Comprehensive income was $42.7 versus a loss of $19.9, principally reflecting a $27.6 foreign-currency translation gain compared with a $27.4 loss in the prior-year quarter.
Financial position, liquidity and debt
At October 3, 2020, cash and cash equivalents were $590.8; short-term investments were $1.5 and current restricted cash was $3.2. Cash, short-term investments and short-term restricted cash totaled $595.5, up from $544.0 at June 27, 2020. Total current assets were $961.6 and current liabilities $227.5. Total assets were $1,824.4 and stockholders’ equity $753.8.
Long-term debt carrying value was $606.6, representing $685.0 principal across $460.0 of 1.00% convertible notes due 2024 and $225.0 of 1.75% convertible notes due 2023, net of discounts and issuance costs. No borrowings were outstanding under the $300 million secured revolving facility, which matures in March 2023. The company reported compliance with debt covenants. Management said existing cash and investments should meet liquidity and capital-spending needs for the next 12 months.
The company reported pension plans underfunded by $113.2 and expects approximately $10.0 of pension-related cash outlays in FY2021. Remaining performance obligations were $205.5, of which approximately 88% was expected to be recognized as revenue within 12 months.
Outlook, commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management said COVID-19’s ultimate financial impact could not be reasonably estimated; prolonged disruption could materially reduce revenue growth and profitability.
- COVID-19 disrupted customer operations, facilities, suppliers, contract manufacturers, shipping and logistics. Management cited weaker NE demand, particularly Field Instruments, and continuing uncertainty in customer demand and order timing. It said the pandemic had not substantially affected liquidity to date.
- Management identified risks from macroeconomic weakness, customer spending delays, pricing pressure and competition, customer concentration, product mix, supply-chain interruptions, trade policies and tariffs, and the pace of adoption of 5G and other technologies. Virtualized networks and software may also reduce demand for some hardware products.
- Other risks include convertible-debt leverage and potential dilution, foreign-exchange exposure, pension obligations, possible impairment of goodwill or other assets, and uncertain tax examinations. Unrecognized tax benefits were $48.3, with $3.6 accrued for interest and penalties.
- Legal matters include a U.K. pension-deed dispute: the related accrued liability was £6.5 million ($8.4 million). Management believes ordinary-course claims are not expected to have a material adverse effect, but notes outcomes are uncertain. Standby letters of credit were $7.5 and performance bonds $0.9.
- The company repurchased 565,000 shares for $6.7 during the quarter; $148.8 remained authorized. The CFO had announced his resignation effective November 20, 2020; an interim CFO was appointed while the company searched for a successor.
- Management reported disclosure controls and procedures were effective as of October 3, 2020, with no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Assess how much the 14-week current quarter versus 13-week comparator affects reported trends, and whether NE demand recovered after COVID-related delays.
- Monitor whether OSP growth and margins are sustainable, including customer concentration and the company’s reliance on SICPA for certain anti-counterfeiting products.
- Review cash conversion and working-capital movements, as well as access to the undrawn revolving facility and the company’s ability to service convertible notes.
- Track pension funding assumptions and payments, the U.K. pension dispute, tax exposures, and any changes to contingent liabilities or impairment assessments.
- Follow the CFO transition and future management guidance; the filing states that actual results may differ materially from any guidance issued.