Business context and reporting period
The supplied filing is JDS Uniphase Corporation’s (JDSU) Form 10-Q for the fiscal quarter ended January 1, 2011, not a filing under the name VIAVI Solutions Inc. JDSU reported three- and six-month results against the periods ended January 2, 2010. Its businesses were Communications Test and Measurement (CommTest), Communications and Commercial Optical Products (CCOP), and Advanced Optical Technologies (AOT).
Financial performance
Amounts are in millions of dollars except per-share data. Quarter and six-month comparisons are year over year.
| Metric | Three months ended Jan. 1, 2011 | Three months ended Jan. 2, 2010 | Six months ended Jan. 1, 2011 | Six months ended Jan. 2, 2010 |
|---|---|---|---|---|
| Revenue | $473.5 | $342.9 | $878.7 | $640.7 |
| Gross profit | $213.8 | $138.2 | $387.1 | $255.3 |
| Gross margin | 45.2% | 40.3% | 44.1% | 39.8% |
| Operating income (loss) | $33.6 | $(13.0) | $34.4 | $(40.5) |
| Net income (loss) | $23.6 | $(19.5) | $23.7 | $(51.4) |
| Diluted earnings (loss) per share | $0.10 | $(0.09) | $0.10 | $(0.24) |
Revenue rose 38.1% for the quarter and 37.1% year to date. Management attributed growth mainly to stronger CCOP and CommTest demand; CommTest also benefited from the Network Solutions Division acquisition. Operating and net results turned profitable in both comparison periods. Gross margin improved, which management linked to product mix, higher volumes and manufacturing-cost absorption. R&D and SG&A expenses increased in dollars, partly reflecting the acquisition, while both declined as a share of revenue year to date.
- Quarter segment revenue: CommTest $227.7 million, CCOP $191.1 million and AOT $54.7 million. CCOP revenue increased 70.2% year over year; CommTest increased 29.4%; AOT was essentially flat.
- Cash flow, six months: Operating cash flow was $96.4 million, investing cash flow was $(36.2) million and financing cash flow was $4.7 million. Capital expenditure was $51.6 million.
- Liquidity at Jan. 1, 2011: Cash and cash equivalents were $408.6 million, short-term investments $212.3 million and restricted cash $34.4 million; together these totaled $655.3 million. Current assets were $1,212.2 million and current liabilities $414.0 million.
- Debt: Long-term debt was $276.3 million, consisting of 1% senior convertible notes due 2026; the company repaid the remaining zero-coupon notes during the quarter. It reported compliance with debt covenants.
- Other notable balances: Total assets were $1,830.7 million; stockholders’ equity was $957.2 million. Inventory was $145.1 million, up from $125.7 million at July 3, 2010.
Material changes, outlook and risks
- CCOP and CommTest drove most of the revenue and operating-income improvement. AOT operating income declined to $17.7 million for the quarter from $19.6 million, which management attributed to product mix and higher R&D costs.
- The May 2010 acquisition of Agilent’s Network Solutions Division cost approximately $163.8 million and contributed to CommTest revenue, expenses and product mix.
- Management expected approximately $29 million of fiscal 2011 cost savings from restructuring and stated that existing cash and investments should cover liquidity and capital spending needs for at least 12 months. The filing gives no specific revenue or earnings forecast.
- Management cited pricing pressure, Asian competition, customer and industry consolidation, variable product mix and seasonal buying, manufacturing-transition disruptions, and new-product yield and quality risks. It cautioned that these factors limit visibility and may cause quarterly variability.
- The company adopted revised revenue-recognition guidance prospectively in fiscal 2011. Under the previous rules, reported revenue would have been approximately $4.0 million lower for the quarter and $6.0 million lower for the six months; management said the effect was below 1% of revenue.
- A Texas franchise-tax audit had an estimated potential liability of $0 to $34.2 million, plus interest and penalties. The company also disclosed $60.5 million of unrecognized tax benefits and $23.3 million accrued for interest and penalties. Management did not expect the audit to materially affect overall trends, but noted an unfavorable resolution could have a material effect in the period resolved.
- Pension plans were underfunded by $86.7 million at January 1, 2011. The company also disclosed ordinary-course legal claims and estimated restructuring obligations, including lease costs extending through fiscal 2018.
Important facts for investors to verify
- Confirm the issuer and security: the filing identifies JDS Uniphase Corporation, whereas the request identifies VIAVI Solutions Inc.
- Review segment-level growth and profitability, especially the sustainability of CCOP’s sharp improvement and the contribution of the acquired NSD business.
- Assess cash conversion and working-capital demands: receivables rose, and operating cash flow included significant non-cash adjustments.
- Check the assumptions behind restructuring savings and lease/sublease estimates, and monitor manufacturing-transition and product-quality risks.
- Track the Texas tax audit, other tax exposures, pension funding requirements and convertible-note terms.