VIAVI Solutions Inc. — Form 10-K Summary
Period: Fiscal year ended June 27, 2020; comparison year ended June 29, 2019. The request metadata says “2019 Q4,” but the supplied filing is the FY2020 annual report. The filing’s fourth quarter ended June 27, 2020.
Business context
Viavi supplies network test, monitoring and assurance products and services, and optical security and performance products. Its reportable segments are Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP). Fiscal 2020 revenue mix was NE 65.7%, SE 9.0%, and OSP 25.3%. Key growth themes include 5G, fiber upgrades and 3D sensing; the filing reports pandemic-related disruption to customer activity and supply chains.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $1,136.3 million | $1,130.3 million |
| Gross profit / margin | $665.3 million / 58.5% | $651.4 million / 57.6% |
| Operating income / margin | $118.1 million / 10.4% | $67.4 million / 5.9% |
| Net income | $28.7 million | $5.4 million |
| Diluted EPS | $0.12 | $0.02 |
| Cash from operations | $135.6 million | $138.8 million |
| Cash, cash equivalents and restricted cash at year-end | $547.4 million | $530.4 million |
Capital expenditures were $31.9 million, so operating cash flow less capital expenditures was approximately $103.7 million. Working capital was $680.8 million, versus $632.8 million. Cash and cash equivalents were $539.0 million, with $1.5 million of short-term investments and $3.5 million of short-term restricted cash.
Debt included $460 million of 1.00% convertible notes due 2024 and $225 million of 1.75% convertible notes due 2023; balance-sheet carrying value of long-term debt was $600.9 million, plus $2.8 million of short-term debt. A $300 million secured revolving facility, maturing March 2023, was established in May 2020 and remained undrawn at year-end. Pension plans were underfunded by $109.9 million.
Material changes and unusual items
- Revenue rose 0.5% year over year. NE increased 1.2% to $746.7 million, SE decreased 0.7% to $102.7 million, and OSP decreased 0.8% to $286.9 million.
- Gross margin improved 0.9 percentage point, while operating income increased substantially. Management cited cost control, restructuring, acquisition synergies, improved manufacturing absorption and higher operating leverage.
- Net income included a $29.5 million gain from remeasurement of the RPC acquisition earn-out liability, following lower-than-expected Android customer adoption and COVID-19 effects. Income tax expense was $65.3 million, including withholding taxes associated with planned repatriation of foreign earnings; the filing cites a $32.5 million charge and $19.5 million of withholding tax paid in fiscal 2020.
- Backlog declined to $204.6 million from $244.1 million. SICPA, an OSP customer, accounted for 12.3% of revenue, down from 14.3% in FY2019.
- Viavi repurchased $44.4 million of common stock and reported no cash dividends. Fiscal 2020 net income improved from FY2019, but remained below operating income partly because of substantial tax expense.
For the fiscal fourth quarter ended June 27, 2020, revenue was $266.6 million, gross profit was $154.6 million, and net income from continuing operations was $26.7 million. The preceding quarter reported a $32.8 million net loss from continuing operations.
Outlook, risks and contingencies
Management describes growth opportunities in 5G wireless, fiber and 3D sensing and says it intends to focus on growth and profitability. The filing provides no specific forward financial guidance. Management says existing cash and investments are expected to meet liquidity and capital spending needs over the next 12 months, while noting that a prolonged recession could create additional liquidity needs.
COVID-19 delayed customer shipments and acceptance, slowed NE Field Instrument demand, and constrained on-site verification for SE products. Supply-chain capacity and materials shortages extended lead times, increased logistics costs and limited deliveries. Other risks include uncertain telecom and cable spending, competitive and pricing pressure, customer and supplier concentration, transition to virtualized/software networks, execution and product-quality challenges, foreign exchange and trade actions, and natural disasters. SICPA represented a significant customer concentration, and Viavi relies exclusively on SICPA to market and sell specified anti-counterfeiting pigments under a license and supply agreement.
Contingencies include a UK pension-related legal matter with an accrued liability of approximately $9.2 million, as well as acquisition earn-outs and ordinary-course claims. The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; revenue recognition judgments for certain NE and SE customer contracts were identified as a critical audit matter.
Important facts for investors to verify
- Confirm the applicable reporting period: the filing covers FY2020, not a standalone FY2019 fourth-quarter report.
- Assess how much reported earnings improvement depends on the RPC earn-out remeasurement gain and how sustainable operating-margin gains are.
- Track COVID-related demand, shipment and acceptance delays, and whether backlog converts to revenue.
- Review the tax cost, timing and cash effects of foreign-earnings repatriation, and the usability of large NOL and tax-credit carryforwards.
- Monitor convertible-note maturities, facility terms and covenants, pension funding requirements, and customer concentration, particularly SICPA.