Viavi Solutions Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended July 2, 2016 (53 weeks), compared with fiscal 2015 (52 weeks). Although the request references 2015 Q4, this filing is an annual report for FY2016; it includes quarterly results but does not represent a standalone 2015 fourth-quarter filing.
Business context
Viavi provides network testing, monitoring and assurance solutions through Network Enablement (NE) and Service Enablement (SE), and optical security and coating products through Optical Security and Performance Products (OSP). On August 1, 2015, Viavi separated its optical components and lasers business into Lumentum; those results are reported as discontinued operations. Viavi retained Lumentum shares and committed to sell them within three years of the separation.
Financial performance and liquidity
| Metric (USD millions, except per-share data) | FY2016 | FY2015 |
|---|---|---|
| Revenue | 906.3 | 873.9 |
| Gross profit / gross margin | 549.7 / 60.7% | 520.1 / 59.5% |
| Operating loss | (84.3) | (75.8) |
| Continuing-operations net loss | (50.4) | (131.4) |
| Net loss, including discontinued operations | (99.2) | (88.1) |
| Diluted loss per share | (0.42) | (0.38) |
| Cash provided by operating activities | 52.9 | 82.3 |
- Revenue rose 3.7%. OSP revenue increased 28.7% to $248.1 million, while NE was nearly flat at $504.6 million and SE declined 11.9% to $153.6 million.
- Gross margin improved 1.2 percentage points, aided by lower technology amortization and favorable OSP anti-counterfeiting mix. The full $91.4 million of SE goodwill was impaired in FY2016; the noncash charge contributed to the operating loss.
- FY2016 continuing operations included a $71.6 million gain on investment sales, primarily from selling 4.5 million Lumentum shares. Viavi still held 7.2 million Lumentum shares at year-end, valued at $171.3 million.
- Cash, short-term investments and restricted cash totaled $979.8 million at year-end; this included $12.2 million of current restricted cash. Cash and cash equivalents were $482.9 million. Working capital was $985.3 million.
- Capital expenditures were $35.5 million. Cash used in financing activities was $147.7 million, including a $137.6 million contribution to Lumentum and $44.5 million of share repurchases.
- The 0.625% senior convertible notes have $650.0 million principal due in 2033 and a $588.3 million carrying amount. Interest expense was $35.7 million, including $26.7 million of noncash debt-discount accretion. Viavi reported compliance with debt covenants and no short-term debt.
Material changes, outlook and risks
- OSP growth reflected above-normal currency reprinting and banknote redesign demand. Management expects anti-counterfeiting revenue to decline in FY2017 as demand normalizes, while citing longer-term growth drivers.
- Management expects further declines in mature SE Assurance and Wireless Solutions offerings in FY2017. It cited longer-than-expected investment cycles for certain SE growth products.
- Restructuring charges were $10.5 million in FY2016, and management estimated approximately $20 million of annualized gross savings from recent restructuring activities. About 190 employees were affected by the largest FY2016 plan.
- Key risks include volatile telecom and cable customer spending, competitive and pricing pressure, product-mix variability, reliance on limited suppliers, and customer concentration. SICPA represented 21.0% of continuing-operations revenue in FY2016.
- A UK pension-related court ruling led to an $8.4 million accrual; Viavi said it was pursuing an appeal and other legal arguments. Other ordinary-course claims remain subject to uncertainty.
- The auditor gave an unqualified opinion on the financial statements but concluded that internal control over financial reporting was ineffective because of a material weakness in controls over the interim tax provision. The weakness caused interim-period misstatements of income tax expense and taxes payable. Viavi planned enhanced controls beginning in FY2017 and anticipated remediation later that year.
- Management stated existing cash and investments should cover liquidity and capital spending requirements for the next 12 months. This outlook remains exposed to operating cash flow, customer payment timing, market conditions, pension funding and financing terms.
Important facts for investors to verify
- Whether the interim income-tax control weakness was remediated and whether related interim financial statements were corrected as required.
- Whether SE revenue, margins and growth-product investment returns improve or further weaken, and whether additional goodwill or asset impairments arise.
- How quickly OSP currency-related demand normalizes and whether growth in other OSP products offsets that decline; monitor the SICPA relationship and concentration.
- Viavi’s cash generation after separation, the use and market value of remaining Lumentum shares, and its capacity to meet the convertible notes’ purchase and conversion provisions.
- Final outcomes and potential cash costs of the pension litigation and other contingencies.