Viavi Solutions Inc. — FY2015 Form 10-K Summary
Reporting period: Fiscal year ended June 27, 2015; the filing also reports the quarter ended that date. Although the request metadata says “2014 Q4,” this is an annual report for FY2015. Amounts are in U.S. dollars unless noted. FY2015 results include the Lumentum businesses, which were separated after year-end.
Business context and reporting period
Before the separation, Viavi operated Network Enablement (NE), Service Enablement (SE), Communications and Commercial Optical Products (CCOP), and Optical Security and Performance Products (OSP). In FY2015, the former Network Service and Enablement segment was split into NE and SE for reporting purposes. On August 1, 2015, Viavi distributed approximately 80.1% of Lumentum to shareholders and retained approximately 19.9%; Lumentum results were expected to be reported as discontinued operations beginning in FY2016. Viavi’s continuing focus is network and service enablement and optical security and performance products.
Financial results and key metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $1,709.1 million | $1,743.2 million |
| Gross profit / gross margin | $778.7 million / 45.6% | $784.3 million / 45.0% |
| Operating loss | $52.3 million | $1.7 million |
| Net loss | $88.1 million | $17.8 million |
| Net loss per diluted share | $0.38 | $0.08 |
| Cash from operating activities | $82.3 million | $176.6 million |
| Capital expenditures | $101.5 million | $99.8 million |
FY2015 operating cash flow less capital expenditures was negative $19.2 million, compared with positive $76.8 million in FY2014. The company reported $839.4 million of cash, cash equivalents, short-term investments and restricted cash at year-end, down from $881.3 million. Working capital was $1,004.6 million. Current assets were $1,380.1 million and current liabilities $375.5 million.
Long-term debt was $561.6 million carrying value, representing $650.0 million principal of 0.625% senior convertible notes due 2033. The notes’ conversion price was adjusted to $11.28 following the Lumentum separation. The company reported compliance with debt covenants. Total stockholders’ equity was $1,101.4 million.
By segment, FY2015 revenue and operating income (loss) were: NE $532.2 million and $90.6 million; SE $169.0 million and a loss of $18.0 million; CCOP $815.1 million and $90.2 million; and OSP $192.8 million and $74.9 million. Segment operating income excludes certain corporate and other unallocated costs, so it does not equal consolidated operating income.
Quarter ended June 27, 2015
Fourth-quarter revenue was $427.7 million, versus $448.6 million in the comparable FY2014 quarter. The company recorded a $26.0 million operating loss and a $40.1 million net loss, compared with a $16.5 million operating loss and a $25.4 million net loss in the prior-year quarter.
Material changes versus prior periods
- Annual revenue declined 2.0%. NE revenue fell 11.7%, mainly due to reduced carrier spending and currency effects; OSP revenue declined 4.0%. SE revenue rose 15.8%, supported by enterprise offerings acquired in 2014 and Location Intelligence. CCOP revenue rose 2.6%, reflecting Datacom and laser growth, partly offset by lower 3-D sensing demand.
- Gross margin improved 0.6 percentage points to 45.6%, helped by higher-margin SE and anti-counterfeiting sales and the exit of lower-margin OSP products. However, the operating loss widened as operating expenses rose to $831.0 million from $786.0 million.
- R&D increased 5.8% to $313.2 million; SG&A increased 2.9% to $463.5 million. SG&A included $30.5 million of non-recurring separation-related costs. Restructuring charges rose to $34.5 million from $23.8 million.
- Operating cash flow decreased to $82.3 million, with working-capital changes using cash. Cash and investment balances fell by $41.9 million overall.
- FY2015 results included a $21.8 million tax benefit from settlement of a non-U.S. tax audit, but the company still recorded $5.2 million of income tax expense. A $3.6 million impairment charge related to acquired Trendium in-process R&D was recorded.
Outlook, commentary, risks and unusual items
Management stated that existing cash and investments were expected to meet liquidity and capital spending needs over the next 12 months. It also estimated approximately $59 million of annualized savings from restructuring initiatives, including about $17 million associated with Lumentum. The filing does not provide specific revenue or earnings guidance for future periods.
Management cited demand uncertainty, carrier and cable spending, pricing pressure, product mix, competition and foreign exchange as factors that could make revenue and margins volatile. The stronger U.S. dollar reduced reported international revenue in FY2015; management estimated constant-currency revenue would have been about $20 million higher. Other risks include dependence on key customers and suppliers, manufacturing and product-quality execution, restructuring and separation costs, and the possibility of customer or partner disruption after the spin-off.
- The separation left Viavi with the 2033 convertible-note obligations and was expected to reduce its future cash flow. Viavi anticipated contributing $137.6 million in cash to Lumentum in FY2016, subject to the separation agreement.
- The company disclosed CEO and CFO transitions: the former CEO departed, the board chairman served as interim CEO, and a new CFO was expected to begin in September 2015.
- Viavi expected a significant taxable gain from the Lumentum separation, while also expecting to use tax attributes to offset it. The filing warns that a challenge to the intended tax-free treatment could create tax liabilities for the company and shareholders.
- FY2015 restructuring charges were $34.5 million, and the restructuring accrual was $32.1 million at year-end. Approximately 600,000 square feet of facilities and about 1,700 employees transferred to Lumentum.
- The filing reported ordinary-course legal claims; management believed resolution would not materially affect the company, but outcomes remained uncertain. It also disclosed environmental remediation obligations at the Santa Rosa site.
Most important facts for investors to verify
- Post-separation financial statements: continuing-business revenue, margins, cash generation and costs after Lumentum is excluded.
- Actual cash contribution to Lumentum, retained-share disposition and the tax consequences of the separation.
- Whether restructuring savings are achieved and whether separation, restructuring or transition costs exceed estimates.
- Liquidity and leverage after the spin-off, including cash available to Viavi and the terms and potential dilution of the 2033 convertible notes.
- Recovery in NE demand and SE profitability, plus the sustainability of OSP margins and sensitivity to customer, product and currency mix.