Business context and reporting period
JDS Uniphase Corporation (JDSU) filed this unaudited Form 10-Q for its fiscal second quarter and six months ended December 27, 2014; comparisons are with the periods ended December 28, 2013. The supplied filing is under JDSU, not VIAVI Solutions Inc. JDSU described four businesses: Network Enablement (NE), Service Enablement (SE), Communications and Commercial Optical Products (CCOP), and Optical Security and Performance Products (OSP).
Financial performance and position
| Metric | Three months ended Dec. 27, 2014 | Six months ended Dec. 27, 2014 | Comparable prior period |
|---|---|---|---|
| Revenue | $437.1 million | $870.7 million | $447.6 million; $876.6 million |
| Gross profit / margin | $200.5 million / 45.9% | $399.8 million / 45.9% | $204.9 million / 45.8%; $390.1 million / 44.5% |
| Operating income (loss) | $(8.2) million | $(4.0) million | $19.8 million; $26.4 million |
| Net income (loss) | $(25.1) million | $(34.8) million | $8.8 million; $9.1 million |
| Diluted EPS | $(0.11) | $(0.15) | $0.04; $0.04 |
| Operating cash flow | $57.4 million for six months | $83.9 million for six months |
- Quarterly revenue declined 2.3%; six-month revenue declined 0.7%. Six-month gross margin improved 1.4 percentage points, while higher operating expenses and special charges drove operating and net losses.
- By segment, quarterly revenue was NE $133.7 million (down 14.2%), SE $45.7 million (up 16.6%), CCOP $207.1 million (up 4.6%), and OSP $50.6 million (down 7.3%). NE weakness reflected reduced carrier spending; SE growth included the acquired Enterprise product line; CCOP growth benefited from lasers; OSP was affected by legacy product exits and lower 3D-sensing demand.
- At December 27, cash and cash equivalents were $293.6 million, short-term investments $545.1 million, and restricted cash $28.9 million: $867.6 million combined. Current assets were $1,417.0 million and current liabilities $402.7 million.
- Long-term debt had a $548.8 million carrying value against $650.0 million principal, representing 0.625% convertible notes due 2033. The company reported compliance with debt covenants and no short-term debt. It also had $32.3 million of standby letters of credit.
- Total assets were $2,295.6 million and stockholders’ equity $1,137.8 million. The six-month cash balance decreased $3.6 million to $293.6 million; investing used $38.7 million and financing used $10.7 million.
Material changes, outlook, and risks
- On September 10, 2014, JDSU announced a planned separation: CCOP would become an optical components and commercial lasers company, while NE, SE, and OSP would form a network and service enablement company. The intended structure was a tax-free pro rata spin-off, expected by the third calendar quarter of 2015, subject to tax, regulatory, board, and other conditions.
- Separation-related restructuring and other incremental costs were $16.7 million for the six months. The quarter included $9.7 million in restructuring charges, including $9.0 million for a workforce plan affecting approximately 170 employees. Management estimated approximately $53 million in annualized savings from restructuring activities initiated in the past year.
- Research and development expense rose 9.7% to $155.6 million for six months. Management said it expected R&D spending in dollar terms to increase in future quarters. A $1.9 million impairment of acquired in-process research and development was recorded in the quarter.
- Management expected lower demand and revenue from 3D-sensing products in CCOP and OSP through fiscal 2015 versus fiscal 2014. It cited uncertain demand, especially in Europe, pricing pressure and competition, customer concentration, product-mix variability, customer spending fluctuations, industry consolidation, and possible operational or customer disruption from the separation.
- Management believed cash and investments would cover liquidity and capital spending needs for the next 12 months. Pension plans were underfunded by $98.3 million; the company expected approximately $4.9 million of fiscal 2015 pension cash outlays. Unrecognized tax benefits were $58.4 million, with $23.1 million potentially recognizable in the next 12 months.
- Routine claims and suits were not believed by management to be materially adverse, but outcomes remained uncertain. The proposed spin-off could fail or be delayed, deliver fewer benefits than expected, disrupt business relationships, or be treated as taxable, potentially creating substantial tax liabilities for the company and shareholders.
Key facts for investors to verify
- Confirm the issuer and entity history: this filing is for JDSU, despite the request metadata naming VIAVI Solutions Inc.
- Track subsequent progress, timing, structure, and costs of the announced separation, including whether the anticipated tax-free treatment was achieved.
- Assess whether NE’s carrier-spending weakness, lower 3D-sensing demand, and segment trends persisted, and whether the expected restructuring savings materialized.
- Review cash generation and working-capital movements alongside the convertible-note terms, pension funding needs, and contingent tax exposures.
- Note that the filing provides no numerical revenue or earnings guidance; management’s outlook is directional and subject to the risks described.