Viavi Solutions Inc. — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended July 3, 2021 (a 53-week year). The filing is an annual report, not a 2020 Q4 filing; the quarterly information below refers to FY2021’s fourth quarter.
Business context
Viavi provides network testing, monitoring and assurance solutions, plus optical security and performance products. Its reportable segments are Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP). Major demand drivers include 5G, fiber-network investment, 3D sensing and anti-counterfeiting applications.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $1,198.9 million | $1,136.3 million |
| Gross profit / margin | $714.4 million / 59.6% | $665.3 million / 58.5% |
| Operating income | $142.2 million | $118.1 million |
| Net income | $46.1 million | $28.7 million |
| Diluted EPS | $0.20 | $0.12 |
| Operating cash flow | $243.3 million | $135.6 million |
| Capital expenditures | $52.1 million | $31.9 million |
Revenue rose 5.5%. Product revenue increased 4.6% and service revenue increased 12.5%. OSP grew 25.8% to $361.0 million, while NE was essentially flat at $746.6 million and SE declined 11.1% to $91.3 million. OSP operating margin increased to 44.7% from 35.6%; combined NE/SE operating margin decreased to 11.0% from 12.8%.
Cash and cash equivalents were $697.8 million; including restricted cash, the combined balance was $708.4 million, up $161.0 million year over year. The company reported $243.3 million of operating cash flow and $58.8 million of cash used in financing, including $42.2 million for share repurchases. Current assets were $1,112.1 million and current liabilities were $705.0 million; the current-liability balance includes $414.2 million of convertible notes classified as short-term.
Convertible notes had total principal of $685.0 million: $225.0 million of 1.75% notes due 2023 and $460.0 million of 1.00% notes due 2024. The 2024 notes became convertible during July–September 2021 under their terms, prompting short-term classification; management said it did not expect conversion requests. The $300 million secured revolving facility, maturing in March 2023, was undrawn at year-end. Pension plans were underfunded by $104.3 million.
Quarterly comparison and notable changes
In FY2021 Q4, revenue was $310.9 million and gross profit was $182.9 million, compared with $266.6 million and $154.6 million, respectively, in FY2020 Q4. FY2021 Q4 recorded a net loss of $1.9 million, or $0.01 per diluted share, versus net income of $26.7 million, or $0.12 per diluted share, in the prior-year quarter.
Annual gross-margin improvement reflected higher volume, favorable mix and better OSP factory utilization. Net income increased, while the effective tax burden remained significant: FY2021 income tax expense was $63.3 million on $109.4 million of pretax income. This included a $19.1 million state-tax charge related to an internal intellectual-property restructuring. The restructuring used $2.3 billion of U.S. federal NOL carryforwards; management maintained valuation allowances against many deferred tax assets.
Outlook, commentary and risks
Management identified 5G wireless, fiber and 3D sensing as expected growth drivers for FY2022, but provided no numerical FY2022 guidance in the supplied filing text. It expected approximately $33.7 million in annualized gross savings from restructuring activities. The company stated existing cash and investments should cover liquidity and capital needs for the next 12 months.
- COVID-19 continued to create demand, facility, shipping and supplier uncertainty. Freight and logistics costs and lead times increased for NE field instruments, although management said supply-chain impacts did not materially affect FY2021 results.
- Management cited concentrated customers, competitive pricing, technology transitions, customer consolidation, component shortages, tariffs and foreign-exchange movements as risks to revenue and margins. SICPA, a major OSP customer and sales partner for anti-counterfeiting pigments, accounted for $193.9 million of FY2021 revenue.
- Convertible-note conversion or refinancing needs, covenant compliance, and possible higher borrowing costs following LIBOR’s replacement remain financial risks. The company reported compliance with debt covenants at year-end.
- A U.K. pension-deed dispute remained accrued at £7.0 million ($9.6 million). The filing also describes ordinary-course legal matters whose outcomes are uncertain; management did not believe their resolution would have a material adverse impact, but noted an unfavorable outcome could be material.
- Auditor PricewaterhouseCoopers LLP issued an unqualified opinion and concluded internal control over financial reporting was effective. Revenue recognition, particularly identification of distinct performance obligations in NE and SE contracts, was identified as a critical audit matter.
Key facts for investors to verify
- Whether OSP growth and its higher margins are sustainable, and whether NE/SE performance recovers from weaker margins and lower SE revenue.
- The status and cash or dilution impact of the $460 million 2024 notes, now classified as short-term, and the 2023 notes approaching maturity.
- FY2022 revenue, margin and cash-flow guidance when issued, including any updated assessment of 5G, fiber and 3D-sensing demand.
- Customer concentration and SICPA purchase commitments, along with supplier availability, lead times and logistics costs.
- Realizability and expiration limits of tax attributes, the effect of the IP restructuring, and the company’s substantial pension obligations and legal contingencies.