VIAVI Solutions Inc. (then JDS Uniphase Corporation) — Form 10-Q Summary
Business context and reporting period
The filing is for the fiscal second quarter and first six months of fiscal 2012, ended December 31, 2011. The company’s businesses were Communications Test and Measurement (CommTest), Communications and Commercial Optical Products (CCOP), and Advanced Optical Technologies (AOT). Results are unaudited and compared with the corresponding periods ended January 1, 2011.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2011 |
|---|---|---|
| Revenue | $412.8 million | $833.6 million |
| Gross profit / margin | $175.0 million / 42.4% | $357.6 million / 42.9% |
| Operating income (loss) | $(1.6) million | $1.6 million |
| Net income (loss) | $(10.2) million | $(16.0) million |
| Diluted EPS | $(0.04) | $(0.07) |
| Operating cash flow | Not presented for the quarter | $68.6 million |
For the six months, capital expenditures were $40.8 million and cash used in investing activities was $50.3 million. Cash and cash equivalents were $415.2 million at period-end; short-term investments were $306.1 million and restricted cash was $34.3 million. The company reported combined cash, cash equivalents, short-term investments, and restricted cash of $755.6 million. Long-term debt carrying value was $295.7 million, comprising 1% senior convertible notes; the company reported compliance with debt covenants. Current assets were $1,302.9 million and current liabilities were $382.6 million.
Changes versus the prior comparable periods
- Quarterly revenue fell 12.8% year over year; six-month revenue fell 5.1%. CommTest and CCOP accounted for most of the decline.
- Quarterly gross margin decreased 2.8 percentage points to 42.4%; the six-month margin decreased 1.2 points to 42.9%.
- Quarterly results shifted from net income of $23.6 million to a $10.2 million loss. Six-month results shifted from net income of $23.7 million to a $16.0 million loss.
- Six-month operating cash flow declined to $68.6 million from $96.4 million in the prior-year period.
- CommTest quarterly revenue declined 14.0% and operating income declined 37.5%; CCOP revenue declined 14.6% and operating income declined 51.2%. AOT revenue declined 1.8% and operating income declined 6.8%.
Outlook, management commentary, and risks
- Management attributed weaker results to reduced carrier spending amid macroeconomic uncertainty, unfavorable product mix, and lower demand in certain product lines. Flooding in Thailand disrupted manufacturing partner Fabrinet; management estimated a roughly $15 million quarterly CCOP revenue impact, with the site returning to full production late in the quarter.
- The filing gives no specific revenue or earnings guidance. Management expects existing cash, investments, and revolving-credit availability to meet liquidity and capital spending needs for at least 12 months. It estimated approximately $33.2 million in annual cost savings from restructuring initiated in fiscal 2011 and the first half of fiscal 2012.
- Risks cited include pricing pressure and product commoditization, customer concentration and consolidation, seasonality and product-mix variability, supply-chain and manufacturing-transition disruptions, and limited market visibility.
- Restructuring charges were $4.0 million for the quarter and $5.5 million for the six months; the period-end restructuring accrual was $9.3 million. A new CommTest reorganization affected approximately 65 employees.
- The company recorded a $7.4 million legal accrual in the first quarter and a further $0.2 million for interest in the second quarter; it intends to continue litigating to set aside the arbitration award. A Texas franchise-tax audit could result in $0–$34.2 million of additional tax liability, plus interest and penalties; management did not expect a material adverse effect based on available information.
- Subsequent to quarter-end, the company entered a five-year $250 million revolving-credit facility, with a possible increase of up to $100 million. It also completed the Dyaptive Systems acquisition for approximately CAD 15.0 million in cash, including a holdback; purchase accounting was not complete when the filing was issued.
Important facts for investors to verify
- Whether revenue, margins, and segment profitability recover from the quarter’s declines, particularly after the Fabrinet disruption.
- The cash-flow effects of working-capital movements, capital spending, and restructuring payments.
- The terms, collateral requirements, financial covenants, and cash-maintenance provisions of the new revolving facility.
- The eventual outcomes and cash exposure from the arbitration dispute and Texas tax audit.
- The acquisition price allocation and subsequent operating contribution of Dyaptive, and progress against projected restructuring savings.