Business context and reporting period
This filing is for JDS Uniphase Corporation (JDSU), not a filing under the name VIAVI Solutions Inc. It reports the first quarter of fiscal 2014, the three months ended September 28, 2013, compared with the three months ended September 29, 2012. JDSU supplied network and service enablement solutions, optical communications and laser products, and optical security products.
In the quarter, JDSU renamed its Communication Test and Measurement segment Network and Service Enablement (NSE). Its other reporting segments were Communications and Commercial Optical Products (CCOP) and Optical Security and Performance Products (OSP).
Financial performance and liquidity
| Metric | Quarter ended Sep. 28, 2013 | Prior comparable quarter |
|---|---|---|
| Revenue | $429.0 million | $420.9 million |
| Gross profit / margin | $185.2 million / 43.2% | $172.6 million / 41.0% |
| Operating income | $6.6 million | $0.1 million |
| Net income (loss) | $0.3 million | $(11.6) million |
| Diluted earnings (loss) per share | $0.00 | $(0.05) |
| Operating cash flow | $29.5 million | $43.1 million |
Revenue increased 1.9% year over year. CCOP revenue rose 5.0% to $204.6 million; NSE rose 1.4% to $171.9 million; OSP fell 7.1% to $52.5 million. Gross margin improved by 2.2 percentage points, attributed mainly to lower acquired-technology amortization and improved CCOP production costs and product mix. Research and development expense increased 13.0% to $69.6 million.
Cash and cash equivalents were $449.3 million and short-term investments were $607.8 million at quarter-end; restricted cash was $30.2 million. Total current assets were $1,619.5 million versus current liabilities of $360.8 million. Long-term debt was $518.2 million, compared with no debt at June 29, 2013. Cash and short-term investments exceeded reported debt by approximately $538.9 million, excluding restricted cash.
Investing activities used $410.9 million, chiefly reflecting purchases of available-for-sale investments. Financing activities provided $547.8 million, primarily from issuing convertible notes, partly offset by a $100.0 million share repurchase. Cash and cash equivalents increased $168.3 million during the quarter.
Material changes versus the prior period
- JDSU issued $650.0 million principal amount of 0.625% senior convertible notes due 2033, receiving $636.3 million after issuance costs. The reported debt carrying value was $518.2 million after accounting for the unamortized discount. The notes have an initial conversion price of $18.83 per share; holders have specified conversion and put rights.
- The company repurchased and retired 7.4 million shares at $13.45 per share for $100.0 million in privately negotiated transactions.
- Operating income improved to $6.6 million from $0.1 million, while net income moved to $0.3 million from a loss of $11.6 million. The prior-period loss included $1.8 million from discontinued operations, the hologram business sold in fiscal 2013.
- Segment performance diverged: CCOP operating income rose to $27.2 million from $23.8 million; NSE fell to $12.6 million from $16.8 million; and OSP fell to $19.1 million from $21.2 million.
- Operating cash flow declined to $29.5 million from $43.1 million, including working-capital cash uses from receivables and accrued payroll.
Outlook, commentary, risks and unusual items
JDSU provided no specific revenue or earnings guidance in the supplied filing text. Management expected research and development investment to continue and increase in dollar terms, and estimated annualized savings of approximately $18.5 million from restructuring actions initiated in the prior year.
Management cited uncertain demand, including continuing economic concerns in Europe; pricing pressure and competition, particularly in optical communications; customer concentration; product-mix variability and seasonality; industry consolidation; and supply-chain, yield, quality and delivery risks associated with contract-manufacturing transitions. Management said existing cash and investments were expected to be sufficient for liquidity and capital spending needs, including repayment of the notes, while identifying working capital, customer payment timing, investment markets, acquisitions, pensions and financing terms as factors that could affect liquidity.
Restructuring produced a $0.8 million benefit in the quarter, and the quarter-end restructuring accrual was $13.1 million. Certain OSP legacy products were being phased out, with completion planned by the end of fiscal 2014’s third quarter. Pension plans were underfunded by $98.4 million at quarter-end; the company expected approximately $5.2 million of fiscal 2014 pension cash outlays. Unrecognized tax benefits were $81.9 million, with $24.9 million accrued for interest and penalties.
Management stated that ordinary-course legal claims were not currently expected to have a material adverse effect, but acknowledged an unfavorable outcome could have a material impact. The filing also describes guarantees and environmental obligations; no liabilities were recorded for the described indemnification guarantees. Disclosure controls and procedures were assessed as effective.
Important facts for investors to verify
- Confirm the issuer and period: this is JDS Uniphase Corporation’s fiscal first quarter of 2014, not a filing explicitly named VIAVI Solutions Inc.
- Review the convertible notes’ conversion, repurchase and redemption provisions, and distinguish the $650.0 million principal from the $518.2 million balance-sheet carrying value.
- Assess whether the modest revenue growth and improved consolidated gross margin are sustainable, given weaker NSE and OSP segment operating income and the stated mix, pricing and demand risks.
- Monitor operating cash generation and working-capital movements, separately from cash changes driven by debt issuance and investment purchases.
- Track restructuring savings and remaining obligations, the pension underfunding, tax exposures and the outcome of legal or other contingencies.