VIAVI SOLUTIONS INC. quarterly report, Q3 FY2012

Business context and reporting period

This filing is for JDS Uniphase Corporation (JDSU), a provider of communications test and measurement solutions and optical products. It covers the unaudited fiscal third quarter and first nine months of fiscal 2012, ended March 31, 2012, compared with periods ended April 2, 2011. The filing identifies JDSU as the registrant; this differs from the request metadata naming VIAVI Solutions and “2011 Q3.”

Financial results and liquidity

For the quarter, CommTest revenue was $177.8 million, CCOP revenue was $173.1 million, and AOT revenue was $58.3 million. The segment table and MD&A show different prior-year CommTest comparison figures; investors should verify the applicable basis.

At March 31, 2012, cash and cash equivalents were $414.0 million, short-term investments $303.2 million, and restricted cash $32.6 million. Current assets were $1,316.2 million and current liabilities $377.1 million. Long-term debt carrying value was $300.8 million; the principal amount of the 1% senior convertible notes was $325 million. JDSU also had a new $250 million revolving credit facility, with no amounts drawn at quarter-end, and reported compliance with debt covenants. Nine-month capital expenditures were $56.9 million.

Material changes versus the prior comparable periods

• Quarterly revenue fell 9.9% year over year; nine-month revenue fell 6.7%. Management attributed the declines mainly to lower volumes in CommTest and CCOP.
• Quarterly gross margin declined 2.5 percentage points to 41.5%; nine-month margin declined 1.6 points to 42.4%. Lower CCOP revenue, pricing and product mix reduced manufacturing cost absorption; Thailand flooding disrupted a key manufacturing partner in the second quarter.
• The quarterly result shifted from $38.6 million net income to a $17.4 million net loss. The prior-year quarter included a $32.1 million tax benefit, primarily related to release of a foreign deferred-tax valuation allowance; the current quarter recorded $3.1 million tax expense.
• Nine-month operating cash flow decreased to $81.8 million from $149.3 million. Working-capital uses included higher inventory and lower accrued payroll and accounts payable, partly offset by collections of receivables.
• CCOP operating income declined to $14.1 million from $39.6 million for the quarter; CommTest operating income was $20.1 million versus $22.6 million, while AOT operating income rose to $19.3 million from $17.9 million.

Outlook, management commentary, risks and unusual items

• Management provided no specific revenue or earnings guidance. It cited limited visibility and expected continued quarterly variability from pricing pressure, customer and product mix, service-provider seasonality, industry consolidation, and manufacturing transitions.
• JDSU expected about $25 million of annualized cost savings from restructuring initiated in the prior year. The company recorded $7.5 million of restructuring charges in the first nine months and had a $9.7 million restructuring accrual at March 31.
• Management said available cash, investments and the undrawn credit facility should be sufficient for liquidity and capital needs, including the expected May 2013 repayment or put of the notes’ $325 million principal. Liquidity remains exposed to business conditions, working capital, capital spending, acquisitions and financing covenant requirements.
• JDSU completed the Dyaptive Systems acquisition in January 2012 for approximately $14.8 million in cash, adding wireless laboratory test tools to CommTest.
• A legal dispute was settled for $7.9 million, paid April 2, 2012; an additional $0.3 million for interest and legal fees was recorded in the quarter. A Texas franchise-tax audit had an estimated potential liability range of $0 to $34.2 million, plus interest and penalties; management said it did not expect a material adverse outcome based on information then available.
• Other exposures include $60.7 million of unrecognized tax benefits and $23.3 million accrued for related interest and penalties; pension underfunding of $78.3 million; foreign-exchange and investment-market risks; and possible disruption from supplier or manufacturing transitions. Disclosure controls were assessed as effective.

Important facts for investors to verify

• Confirm the intended issuer and reporting period: the supplied filing is JDSU’s fiscal Q3 2012 Form 10-Q, not a filing labeled VIAVI or 2011 Q3.
• Reconcile the differing CommTest prior-year revenue figures in the segment table and MD&A.
• Review cash availability and restrictions, the credit facility’s collateral and covenants, and the timing and funding plan for the May 2013 convertible-note payment.
• Track the Texas tax audit, other tax exposures, the settled legal payment, and pension funding requirements.
• Assess whether CCOP demand, margins, manufacturing-partner stability and planned restructuring savings improve; management cautioned that visibility remains limited.