VIAVI Solutions Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 31, 2018, with comparative results for the three and nine months ended April 1, 2017. The filing is for fiscal 2018 Q3, notwithstanding the request metadata’s “2017 Q3” label. Financial statements are unaudited; amounts are in U.S. dollars and millions unless stated otherwise.
Business context and key financial results
VIAVI provides network test, monitoring and assurance solutions through Network Enablement (NE) and Service Enablement (SE), and optical products through Optical Security and Performance Products (OSP). In March 2018, it acquired Cobham’s AvComm and Wireless Test and Measurement business, which is being integrated into NE.
| Metric | Three months ended Mar. 31, 2018 | Prior comparable quarter | Nine months ended Mar. 31, 2018 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $219.4 | $196.0 | $616.4 | $613.3 |
| Gross profit / margin | $123.7 / 56.4% | $117.0 / 59.7% | $356.0 / 57.8% | $366.8 / 59.8% |
| Operating income (loss) | $0.4 | $(15.2) | $14.1 | $1.6 |
| Net income (loss) | $(8.7) | $26.0 | $(17.2) | $153.2 |
| Diluted earnings (loss) per share | $(0.04) | $0.11 | $(0.08) | $0.65 |
| Cash provided by operating activities | Not provided for quarter | $48.5 | $57.6 |
- Quarterly revenue rose 11.9%, primarily from NE, including $12.3 million of AW acquisition revenue and stronger cable and fiber field-instrument demand. Nine-month revenue increased only 0.5%.
- Nine-month segment revenue: NE $360.3 million, up 6.3%; SE $91.2 million, down 13.7%; OSP $164.9 million, down 2.2%. NE growth was partly offset by weaker lab-instrument demand; SE was affected by runoff and planned reduction of assurance offerings.
- Gross margin declined year over year in both periods, reflecting NE and OSP mix and higher acquired-intangible amortization. Quarterly operating results improved substantially as restructuring charges fell to $0.3 million from $18.4 million.
- Prior-year net income included investment-sale gains of $51.2 million for the quarter and $186.6 million for nine months, principally from Lumentum shares. These gains did not recur; they materially affect the net-income comparisons.
- Nine-month operating cash flow was $48.5 million, versus $57.6 million. Investing cash outflow was $298.1 million, including $509.9 million for acquisitions, partly offset by investment maturities and sales. Financing cash outflow was $246.3 million, including debt and share repurchases.
Liquidity, debt and capital allocation
- At March 31, 2018, cash and cash equivalents were $534.3 million, short-term investments $196.2 million, and restricted cash $7.5 million. Together these totaled $738.0 million, down $709.8 million from July 1, 2017.
- Total debt carrying value was $786.0 million: $420.4 million classified as current and $365.6 million long-term. Principal outstanding was $428.5 million on the 0.625% convertible notes due 2033 and $460.0 million on the 1.00% notes due 2024. The 2033 notes were classified current because holders may require repurchase in August 2018; the company repurchased $181.5 million principal during the nine-month period.
- Management stated existing cash and investments should be sufficient for liquidity and capital spending needs over the next 12 months. VIAVI reported compliance with debt covenants.
- The company spent $40.8 million repurchasing common stock over nine months. Its repurchase authorization was increased to $200 million and extended through September 30, 2019.
Outlook, commentary, risks and unusual items
- No specific numerical revenue or earnings guidance was provided. Management expects continued decline in Mature Assurance revenue in fiscal 2018 and says 3D-sensing products may become more significant over the longer term as adoption develops.
- Management cited demand and visibility uncertainty, customer concentration, competition and pricing pressure, product mix and buying-pattern variability, industry consolidation, and currency movements as factors that may cause quarterly volatility. It expects gross-margin variability to continue.
- Restructuring actions are intended to improve efficiency; management estimated approximately $9 million in annualized gross savings from restructuring activities initiated in the prior year, excluding one-time charges. Approximately 340 employees were affected by the focused NSE plan; a separate Trilithic integration plan affected about 40 employees.
- The Cobham AW acquisition closed March 15, 2018 for $469.8 million cash consideration, subject to adjustment. Purchase accounting was preliminary and included $171.9 million goodwill. The acquired business contributed $12.3 million revenue and a $2.4 million net loss in the reported periods.
- The U.S. Tax Cuts and Jobs Act produced a $6.5 million tax benefit for the nine months. The company’s deemed-repatriation tax estimate remained provisional; its deferred-tax remeasurement was incomplete.
- A U.K. appellate court affirmed a pension-deed ruling; the related accrued liability was GBP 6.0 million ($8.4 million). The company is pursuing a claim against the law firm involved. Other ordinary-course claims were disclosed, with outcomes uncertain.
- VIAVI disclosed a temporary production stoppage when its Santa Rosa facility closed during 2017 wildfires and identified wildfire and earthquake exposure to Northern California facilities. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the August 2018 holder put for the 2033 notes was exercised and how VIAVI funded any required repurchase.
- Final purchase-price allocation, integration costs, and operating contribution from the Cobham AW business.
- Trends in NE lab-instrument demand, SE assurance runoff, OSP margins, and 3D-sensing revenue and profitability.
- Cash conversion and working-capital needs, particularly receivables and inventory, alongside the company’s acquisition and repurchase spending.
- Final tax effects of the Tax Cuts and Jobs Act and developments in the U.K. pension litigation and related recovery claim.