Business context and reporting period
JDS Uniphase Corporation (JDSU; now VIAVI Solutions) filed this Form 10-K for fiscal 2014, the 52 weeks ended June 28, 2014. The company supplied network and service-enablement products, optical communications and commercial lasers, and optical security products through its NSE, CCOP and OSP segments. The filing also reports fourth-quarter results for the quarter ended June 28, 2014.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $1,743.2 million | $1,676.9 million |
| Gross profit / margin | $784.3 million / 45.0% | $694.6 million / 41.4% |
| Operating income (loss) | $(1.7) million | $(24.9) million |
| Net income (loss) | $(17.8) million | $57.0 million |
| Net income (loss) per diluted share | $(0.08) | $0.24 |
| Cash from operating activities | $176.6 million | $187.8 million |
- Revenue rose 4.0%. CCOP revenue increased 7.0% to $794.1 million, NSE increased 2.7% to $748.3 million, and OSP declined 2.4% to $200.8 million.
- Gross margin improved 3.6 percentage points, attributed mainly to lower technology amortization, NSE cost efficiencies and improved CCOP product mix and costs.
- Year-end cash, cash equivalents, short-term investments and restricted cash totaled $881.3 million, up $365.4 million. Working capital was $1,001.1 million; total assets were $2,351.9 million.
- Long-term debt had a $536.3 million carrying value against $650.0 million principal on 0.625% convertible notes due 2033. There was no short-term debt; the company reported compliance with debt covenants. Long-term obligations were $755.8 million.
- Investing cash outflow was $651.8 million, including $216.0 million for acquisitions and $99.8 million for capital expenditures. Financing cash inflow was $489.6 million, principally from the note issuance; share repurchases used $155.2 million.
- Fourth-quarter revenue was $448.6 million and net loss was $25.4 million. Quarterly results included a $20.0 million restructuring charge.
Material changes versus the prior comparable period
- FY2014 returned to a net loss after FY2013 net income. FY2013 included a $107.9 million deferred-tax valuation-allowance release; FY2014 included a $21.7 million tax benefit from the expiration of a non-U.S. tax statute of limitations. These items make year-over-year net income less comparable.
- Operating cash flow was lower by $11.2 million year over year. The substantial increase in reported liquidity was supported by the $650.0 million convertible-note issuance, partly offset by acquisitions, repurchases and capital spending.
- FY2014 acquisitions included Network Instruments for approximately $208.5 million, Time-Bandwidth for $15.0 million, and Trendium assets for $26.1 million. These acquisitions increased goodwill and expanded enterprise network software and laser offerings.
- R&D expense rose 14.5% to $296.0 million, or 17.0% of revenue. Restructuring charges increased to $23.8 million from $19.0 million.
- Segment operating income was $80.3 million for NSE, $93.5 million for CCOP, and $72.0 million for OSP. NSE operating margin fell to 10.7% from 11.4%; CCOP rose to 11.8% from 11.1%; OSP was 35.9% versus 35.6%.
Outlook, commentary, risks and unusual items
- The filing provides no quantified consolidated revenue or earnings guidance. Management expected R&D investment in dollar terms to increase and anticipated lower 3D-sensing demand and revenue in the first two quarters of FY2015 compared with the year-earlier periods.
- Management estimated annualized savings of approximately $32.3 million from restructuring activities. The year-end restructuring accrual was $26.2 million; savings are estimates and implementation costs and timing remain relevant.
- Key risks include telecom and cable customer spending uncertainty, pricing pressure and commoditization, Asia-based competition, product and customer mix volatility, customer concentration, supply constraints, manufacturing execution and quality, and economic uncertainty in Europe. International customers generated 52.6% of FY2014 revenue.
- The $650.0 million notes are convertible under specified conditions and may dilute shareholders; holders may require repurchase at par on specified dates beginning in 2018 or following certain events. The filing notes potential vulnerability to industry downturns from increased leverage.
- The company was disputing the amount due under an earnout connected with the prior sale of its hologram business; the potential earnout was capped at $4.0 million. Management said ordinary-course claims were not expected to have a material adverse impact, while noting an unfavorable outcome could be material.
- In July 2014, NSE was reorganized into separate Network Enablement and Service Enablement reporting segments, effective FY2015. The independent auditor gave an unqualified opinion on the financial statements and internal controls; Network Instruments was excluded from the internal-control assessment because it had recently been acquired.
Most important facts for investors to verify
- Whether revenue and margins can sustain improvement, particularly after the expected near-term decline in 3D-sensing sales and amid telecom pricing pressure.
- How much of FY2014 liquidity is freely available versus restricted, and the cash-flow and dilution consequences of the $650.0 million convertible notes.
- Whether the acquisitions deliver expected growth and returns relative to their purchase prices, goodwill and integration costs.
- Whether the projected $32.3 million annualized restructuring savings are realized and how much further restructuring cash outlay is required.
- How tax valuation allowances, tax audits and the unresolved hologram earnout dispute affect future earnings and cash flows.