VIAVI Solutions Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 28, 2020, with nine-month comparisons to March 30, 2019. The request metadata says “2019 Q3,” but the filing covers fiscal 2020 Q3. Figures are unaudited and in millions of dollars except per-share data.
Business context and financial results
VIAVI supplies network testing, monitoring and assurance solutions through Network Enablement (NE) and Service Enablement (SE), and optical products through Optical Security and Performance Products (OSP).
| Metric | Quarter ended March 28, 2020 | Prior-year quarter | Nine months ended March 28, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $256.2 | $265.2 | $869.7 | $840.6 |
| Gross profit / margin | $146.8 / 57.3% | $153.5 / 57.9% | $510.7 / 58.7% | $481.9 / 57.3% |
| Operating income | $9.1 | $7.9 | $74.8 | $39.6 |
| Net income (loss) | $(32.8) | $(4.8) | $2.0 | $(7.1) |
| Diluted earnings (loss) per share | $(0.14) | $(0.02) | $0.01 | $(0.03) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $108.4 | $110.3 |
Material changes and key financial position
- Quarterly revenue declined 3.4%; NE revenue fell 9.2% and SE fell 7.2%, while OSP increased 15.7%. Management attributed NE and SE weakness in part to COVID-19-related customer shutdowns, shipment and acceptance delays, and ongoing runoff of mature SE products.
- Nine-month revenue increased 3.5%. NE growth reflected 5G, fiber/400Gb upgrades and DOCSIS 3.1 demand; OSP growth reflected 3D Sensing demand. SE revenue declined 5.2%.
- Quarterly operating income rose to $9.1 million despite lower revenue; nine-month operating income rose to $74.8 million, including lower restructuring charges and benefits, improved gross profit, and a favorable change in contingent consideration fair value.
- Quarterly net loss was driven chiefly by a $38.8 million tax provision, including a $31.6 million withholding-tax charge on planned repatriation of $316.4 million of foreign earnings. Nine-month tax provision was $57.0 million.
- Nine-month operating cash flow was $108.4 million, versus $110.3 million. Capital expenditures were $23.6 million. Cash, cash equivalents and restricted cash totaled $540.9 million at period end.
- At March 28, 2020, current assets were $914.0 million and current liabilities $239.1 million. Long-term debt carrying value was $595.3 million; principal outstanding was $685.0 million across 1.00% notes due 2024 and 1.75% notes due 2023. The company reported compliance with debt covenants.
- Stockholders’ equity was $676.9 million, down from $725.8 million at June 29, 2019. The company repurchased $43.8 million of shares during the nine months.
Outlook, risks and unusual items
- VIAVI suspended its fourth-quarter fiscal 2020 guidance because the duration and full financial impact of COVID-19 could not be reasonably estimated. Management warned that prolonged disruption could materially reduce revenue growth and profitability.
- COVID-19 had disrupted facilities, suppliers, contract manufacturers, shipping and customer acceptance. The filing also cites risks from weaker customer spending, credit-market tightening, customer payment delays and possible recession.
- On May 5, 2020, after quarter end, VIAVI entered into a $300 million senior secured revolving credit facility maturing March 1, 2023. No amounts were outstanding as of May 7, 2020. The filing states existing liquidity and facility availability were expected to meet needs over the next 12 months.
- Other risks include competition and pricing pressure, customer concentration, product mix and seasonality, foreign-exchange movements, trade policies, technology-adoption uncertainty, and Northern California wildfire and earthquake exposure.
- The company reported a $102.9 million underfunding of pension plans at March 28, 2020. It also disclosed ongoing ordinary-course legal matters and a U.K. pension-related dispute, with an accrued liability of approximately $8.0 million.
Most important facts for investors to verify
- Whether COVID-19-related demand, production, shipping and customer acceptance disruptions persist, and the effect on subsequent revenue and margins.
- How the $31.6 million repatriation tax charge and movement of foreign earnings affect cash availability and future tax expense.
- Debt terms, covenant headroom and liquidity needs, including the secured nature of the post-quarter credit facility.
- Pension funding exposure, tax uncertainties and the possible outcome of the U.K. pension dispute and other contingencies.
- Whether OSP growth and NE demand trends offset ongoing SE declines and the weakness in quarterly NE sales.