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JDS UNIPHASE CORP /CA/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q which are not
historical facts are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. A
forward-looking statement may contain words such as "anticipates," "believes,"
"can impact," "could," "continue," "estimates," "expects," "intends," "may,"
"ongoing," "plans," "potential," "projects," "should," "will," "will continue to
be," "would," or the negative thereof or other comparable terminology regarding
beliefs, plans, expectations or intentions regarding the future. Forward-looking
statements include statements such as:
† our expectations regarding demand for our products, including continued trends
in end-user behavior and technological advancements that may drive such demand;
† our belief that the Company is well positioned to benefit from certain
industry trends and advancements, and our expectations of the role we will play
in those advancements;
† our plans for growth and innovation opportunities;
† our plans to continue to operate as a Company comprised of a portfolio of
businesses with a focus on optical and broadband innovation;
† financial projections and expectations, including profitability of certain
business units, plans to reduce costs and improve efficiencies, the effects of
seasonality on certain business units, continued reliance on key customers for a
significant portion of our revenue, sources of revenue, sources of competition
and pricing pressures, the future impact of certain accounting pronouncements
and our estimation of the potential impact and materiality of litigation;
† our plans for continued development, use and protection of our intellectual
property;
† our strategies for achieving our current business objectives, including
related risks and uncertainties;
† our plans or expectations relating to investments, acquisitions, partnerships
and other strategic opportunities;
† our strategies for reducing our dependence on sole suppliers or otherwise
mitigating the risk of supply chain interruptions;
† our research and development plans; and
† our expectations related to our products, including costs associated with the
development of new products, product yields, quality and other issues.
Management cautions that forward-looking statements are based on current
expectations and assumptions and are subject to risks and uncertainties that
could cause our actual results to differ materially from those projected in such
forward-looking statements. These forward-looking statements are only
predictions and are subject to risks and uncertainties including those set forth
in Part II, Item 1A "Risk Factors" and elsewhere in this Quarterly Report on
Form 10-Q and in other documents we file with the Securities and Exchange
Commission. Moreover, neither we assume nor any other person assumes
responsibility for the accuracy and completeness of the forward-looking
statements. Forward-looking statements are made only as of the date of this
Report and subsequent facts or circumstances may contradict, obviate, undermine
or otherwise fail to support or substantiate such statements. We are under no
duty to update any of the forward-looking statements after the date of this
Form 10-Q to conform such statements to actual results or to changes in our
expectations.
In addition, Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our Annual Report on
Form 10-K for the fiscal year ended July 2, 2011.
OUR INDUSTRIES AND QUARTERLY DEVELOPMENTS
JDSU provides communications test and measurement solutions and optical products
for telecommunications service providers, cable operators, and network equipment
manufacturers. JDSU technologies also enable optical and commercial laser
innovation in many essential industries such as biomedical and environmental
instrumentation, semiconductor processing, aerospace and defense, and brand
protection and enhancement.
To serve its markets, JDSU operates in the following business segments:
CommTest, CCOP, and AOT.
Communications Test and Measurement
The CommTest business segment is a leading provider of instruments,
service-assurance systems, and services for communications network operators and
equipment manufacturers that deliver and/or operate broadband/IP networks
(cable, fixed, and mobile) deploying triple- and quad-play (voice, video, data,
and wireless) services.
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JDSU CommTest solutions accelerate the deployment of new services, lower
operating expenses, reduce customer turnover, and increase productivity across
each critical phase of the network lifecycle including research and development,
production, deployment, and service assurance. JDSU enables the effective
management of services, such as Voice over Internet Protocol (VoIP), 4G/LTE and
Internet Protocol TV (IPTV), by providing visibility into the end-user
experience and also by providing repair, calibration, instrument management, and
other services to aid its customers in the rapid deployment and repair of
networks and services.
JDSU test solutions address lab and production (capacity expansion, 40G/100G),
field service (triple-play deployments for cable, telecom, FTTx, and home
networking), and service assurance (quality of experience) for Ethernet and IP
services over cable, wireless, and fixed/telecom networks. JDSU also provides
protocol test solutions for the development and field deployment of storage and
storage-network technologies.
JDSU CommTest customers include the world's largest communications service
providers, communications equipment manufacturers, government organizations, and
large corporate customers. These include major telecom and cable operators such
as AT&T, Bell Canada, Bharti Airtel Limited, British Telecom, China Mobile,
China Telecom, Chunghwa Telecom, Comcast, CSL, Deutsche Telecom, France Telecom,
Saudi Telecom Company, TalkTalk, Telefónica, Telmex, TimeWarner Cable, and
Verizon. JDSU test and measurement customers also include many of the
network-equipment manufacturers served by our CCOP segment, including
Alcatel-Lucent, Ciena, Cisco Systems, Fujitsu, and Huawei. JDSU test and
measurement customers also include chip and infrastructure vendors,
storage-device manufacturers, storage-network and switch vendors, and deployed
private enterprise customers. Storage-segment customers include Brocade, Cisco
Systems, EMC, Hewlett-Packard, and IBM.
Communications and Commercial Optical Products
The CCOP business segment is a leading provider of products and technologies
used in the optical communications and commercial laser markets.
CCOP Optical Communications products include a wide range of components,
modules, subsystems, and solutions for two market segments: telecommunications,
including access (local), metro (intracity), long-haul (city-to-city and
worldwide), and submarine (undersea) networks; and, enterprise data
communications including storage access networks (SANs), local area networks
(LANs), and Ethernet wide-area networks (WANs). The products enable the
transmission and transport of video, audio, and text data over high-capacity,
fiber-optic cables. Transmission products primarily consist of optical
transceivers, optical transponders, and their supporting components such as
modulators and source lasers including vertical-cavity surface-emitting lasers
(VCSELs). Transport products primarily consist of amplifiers, ROADMs, and Super
Transport Blades, and their supporting components such as 980 nanometer (nm)
pumps, passive devices, and array waveguides (AWGs).
Diode lasers from JDSU's CCOP segment combine with optical filters from the
Company's AOT business segment to create a unique gesture recognition solution.
Gesture recognition systems enable people to control technology with natural
body gestures instead of using a remote, mouse or other device. Emerging gesture
recognition systems simplify the way that people interact with technology, and
are first being used in applications for home entertainment and computing.
CCOP Laser Products serve a wide variety of original equipment manufacturer
(OEM) applications from low- to high-power output and with ultraviolet (UV),
visible, and IR wavelengths. The broad portfolio addresses the needs of laser
clients in applications such as micromachining, materials processing,
bioinstrumentation, consumer electronics, graphics, medical/dental, and optical
pumping. Core laser technologies include continuous-wave, q-switched, and
mode-locked lasers addressing application needs from continuous-wave to
megahertz repetition rates. Our commercial optical products include diode,
direct-diode, diode-pumped solid-state (DPSS), and gas lasers.
CCOP provides two lines of Photovoltaic Products. Concentrated photovoltaic
(CPV) cell products convert light into electrical energy, enabling
high-efficiency solar cells and receiver assemblies. Photonic Power (PP)
products transport energy over optical fiber, enabling electromagnetic- and
radio-interference-free power and data transmission for remote sensors such as
high-voltage line current monitors.
Today's most advanced optical networks are built with JDSU transport and
transmission components, modules, and subsystems. Customers for Optical
Communications products includes Adva, Alcatel-Lucent, Ciena, Cisco Systems,
Ericsson, Fujitsu, Huawei, Infinera, Nokia Siemens Networks, and Tellabs.
Customers for JDSU Commercial Lasers include Amada, ASML, Beckman Coulter,
Becton Dickinson, Disco, Electro Scientific Industries, and KLA-Tencor.
Customers for Photovoltaic Products include Amplifier Research, Beijing Bosin
Industrial Technology, ETS-Lindgren, and Siemens.
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Advanced Optical Technologies
The AOT business segment leverages its core technology strengths in optics and
materials science to manage light and/or color effects for a wide variety of
markets from product security to space exploration. AOT consists of the
Authentication Solutions group, the Custom Optics Products group, and the Flex
Products group.
The Authentication Solutions group provides multilayer authentication solutions
that include overt, covert, forensic, and digital technologies for protection
from product and document counterfeiting and tampering. These solutions, many of
which leverage AOT color-shifting and holographic technologies, safeguard brands
across a wide-range of industries, including document security, transaction
card, pharmaceutical, consumer electronics, printing/imaging supplies,
licensing, and fast-moving consumer goods industries. The group's high-end
printing services produce labels for a wide variety of commercial and industrial
products.
The Custom Optics Products group produces precise, high-performance, optical
thin-film coatings for a variety of applications in government and aerospace,
biomedical, display, office automation, entertainment, and other emerging
markets. These applications include gesture recognition, night-vision goggles,
satellite solar covers, medical instrumentation, information displays, office
equipment, computer-driven projectors, and 3D cinema.
The Flex Products group includes custom color solutions, a product line of
unique solutions for product finishes and a wide variety of decorative
packaging. These include innovative, optically-based, light-management solutions
that provide product enhancement for brands in the pharmaceutical, automotive,
consumer electronics, and fast-moving consumer goods industries. The group's
color-shifting pigments protect the currencies of more than 100 countries
globally.
The AOT business segment serves customers such as 3M, Kingston, Lockheed Martin,
Northrup Grumman, Pan Pacific, Seiko Epson, and SICPA.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See "Note 2. Recently Issued Accounting Pronouncements" regarding the effect of
certain recent accounting pronouncements on our consolidated financial
statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a description of the critical accounting policies that affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements, refer to Item 7 on Management Discussion and Analysis and
Item 8 within the notes to the consolidated financial statements on Loss
Contingencies in our Fiscal 2011 Annual Report on Form 10-K filed with the
Securities and Exchange Commission ("SEC").
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RESULTS OF OPERATIONS
The results of operations for the current period are not necessarily indicative
of results to be expected for future periods. The following table summarizes
selected Consolidated Statement of Operations items (in millions, except for
percentages):
Three Months Ended Six Months Ended
December 31, January 1, Percentage December 31, January 1, Percentage
2011 2011 Change Change 2011 2011 Change Change
Segment Net
Revenue:
CommTest $ 195.9 $ 227.7 $ (31.8 ) $ 380.8 $ 404.4 $ (23.6 )
CCOP 163.2 191.1 (27.9 ) 343.5 359.1 (15.6 )
AOT 53.7 54.7 (1.0 ) 109.3 115.2 (5.9 )
Net revenue $ 412.8 $ 473.5 $ (60.7 ) (12.8 )% $ 833.6 $ 878.7 $ (45.1 ) (5.1 )%
Gross profit $ 175.0 $ 213.8 $ (38.8 ) (18.1 )% $ 357.6 $ 387.1 $ (29.5 ) (7.6 )%
Gross margins 42.4 % 45.2 % 42.9 % 44.1 %
Research and
development 59.4 60.2 (0.8 ) (1.3 )% 119.2 116.6 2.6 2.2 %
Percentage of
net revenue 14.4 % 12.7 % 14.3 % 13.3 %
Selling, general
and
administrative 106.0 109.5 (3.5 ) (3.2 )% 217.2 216.7 0.5 0.2 %
Percentage of
net revenue 25.7 % 23.1 % 26.1 % 24.7 %
Amortization of
acquired
technologies 15.4 14.1 1.3 9.2 % 29.7 28.2 1.5 5.3 %
Percentage of
net revenue 3.7 % 3.0 % 3.6 % 3.2 %
Amortization of
other
intangibles 7.2 8.0 (0.8 ) (10.0 )% 14.1 16.6 (2.5 ) (15.1 )%
Percentage of
net revenue 1.7 % 1.7 % 1.7 % 1.9 %
Restructuring
and related
charges 4.0 2.5 1.5 60.0 % 5.5 2.8 2.7 96.4 %
Percentage of
net revenue 1.0 % 0.5 % 0.7 % 0.3 %
Net Revenue
Net revenue during the three months ended December 31, 2011 decreased $60.7
million, or 12.8%, to $412.8 million from $473.5 million during the same period
a year ago. Net revenue during the six months ended December 31, 2011 decreased
$45.1 million, or 5.1%, to $833.6 million from $878.7 million during the same
period a year ago. For both the three and six month periods, the decrease was
primarily due to a decline in volume in our CommTest and CCOP segments. The
decrease in revenue in our CommTest segment was primarily the result of
uncertainty in the macro-economic environment which reduced carriers' spending
in Europe and North America, partially offset by growth in Latin America. The
decrease in revenue in our CCOP segment was driven by a decline in volume of
Circuit Packs, Commercial Diode Lasers, and ROADMs product lines, primarily as a
result of flooding in Thailand which temporarily suspended operations of
Fabrinet, one of CCOP's primary manufacturing partners, during the second fiscal
quarter of 2012 and due to reduced demand for gesture recognition products
compared to the same periods a year ago when the product category was
successfully launched. The decrease in revenue in our AOT segment was primarily
due to reduced demand for our gesture recognition products, as compared to the
same periods a year ago, when the product category was successfully launched.
This decrease was partially offset by increases in currency products of our AOT
segment.
During the three months ended December 31, 2011, one of our primary CCOP segment
manufacturing partners, Fabrinet, experienced significant flooding which
resulted in suspension of operations for a portion of the quarter.
Manufacturing operations at
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--------------------------------------------------------------------------------Fabrinet's Thailand site supporting our CCOP segment returned to full production
capacity late in the quarter. This impact on net revenue as a result of the
flooding was approximately $15 million to our CCOP segment for the quarter
ending December 31, 2011.
Going forward, we expect to continue to encounter a number of industry and
market structural risks and uncertainties that may limit our business climate
and market visibility, and consequently, our ability to predict future revenue,
profitability and general financial performance, and that could create quarter
over quarter variability in our financial measures. These structural risks and
uncertainties include: (a) strong pricing pressures, particularly within our
CCOP markets, due to, among other things, a highly concentrated customer base,
increasing Asia-based competition, and commercial optical industry and a
general commoditization trend for many of our products; (b) high product mix
variability, particularly in our CCOP markets, which causes revenue variability,
as well as gross profit variability due to, among other things, factory
utilization fluctuations and inventory and supply chain management complexities;
(c) continuing service provider seasonality, which causes demand, revenue and
profitability volatility at each level of the communications industry. Moreover,
the current trend of communication industry consolidations is expected to
continue, directly affecting our CCOP and CommTest customer base and adding
additional risk and uncertainty to our financial and business predictability.
Our program of assembly manufacturing transitions will continue, but until
completed, these activities will continue to present additional supply chain and
product delivery disruption risks, yield and quality concerns and increased cost
risks. These risks, while expected to diminish over the next several quarters,
limit our ability to predict longer term revenue, profitability and general
financial performance.
We operate primarily in three geographic regions: Americas, EMEA (Europe, the
Middle East and Africa) and Asia-Pacific. The following table presents net
revenue by geographic regions (in millions):
Three Months Ended Six Months Ended
December 31, January 1, December 31, January 1,
Net revenue: 2011 2011 2011 2011
Americas $ 208.3 $ 240.2 $ 420.4 $ 440.5
EMEA 100.7 121.5 201.7 225.7
Asia-Pacific 103.8 111.8 211.5 212.5
Total net revenue $ 412.8 $ 473.5 $ 833.6 $ 878.7
Net revenue was assigned to geographic regions based on customer shipment
locations. Net revenue from customers in the Americas during the three months
ended December 31, 2011 and January 1, 2011 included net revenue from the United
States of $161.0 million and $194.8 million, respectively. Net revenue from
customers in the Americas during the six months ended December 31, 2011 and
January 1, 2011 included net revenue from the United States of $334.5 million
and $353.1 million, respectively.
Net revenue from customers outside the Americas during the three months ended
December 31, 2011 and January 1, 2011 represented 49.5% and 49.3% of net
revenue, respectively. Net revenue from customers outside the Americas during
the six months ended December 31, 2011 and January 1, 2011, represented 50.0%
and 49.9% of net revenue, respectively. We expect revenue from customers outside
of North America to continue to be an important part of our overall net revenue
and an increasing focus for net revenue growth opportunities.
Gross Margin
Gross margin in the three months ended December 31, 2011, decreased 2.8
percentage points to 42.4% from 45.2% compared to the same period a year ago.
Gross margin in the six months ended December 31, 2011, decreased 1.2 percentage
points to 42.9% from 44.1% compared to the same period a year ago. For both the
three and six month periods, the decrease in gross margin was primarily due to a
decline in revenue in our CommTest and CCOP segments, matched with an increase
in amortization of acquired technologies and stock based compensation expense as
compared to the same periods a year ago. Gross margin in our CommTest segment
declined as a result of uncertainty in the macro-economic environment which
reduced carriers' spending in Europe and North America, paired with unfavorable
product mix. The decline in gross margin in our CCOP segment was primarily due
to higher production variances as a result of flooding in Thailand which
temporarily suspended the operations of Fabrinet, one of CCOP's primary
manufacturing partners, and due to unfavorable laser product mix. Gross margin
in our AOT segment declined slightly due to unfavorable manufacturing variances
for both the three and six month periods, paired with reduced revenues during
the six month period.
As discussed in more detail under "Net Revenue" above, we sell products in
certain markets that are consolidating, undergoing product, architectural and
business model transitions, have high customer concentrations, are highly
competitive (increasingly due to Asia-based competition), are price sensitive
and are affected by customer seasonal and mix variant buying patterns. We expect
these factors to continue to result in quarterly variability of our gross
margin.
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--------------------------------------------------------------------------------Research and Development ("R&D")
R&D expense for the three months ended December 31, 2011 decreased $0.8 million,
or 1.3%, to $59.4 million from $60.2 million compared to the same period a year
ago. As a percentage of revenue, R&D expense increased to 14.4% compared to
12.7% in the same period a year ago. The dollar decrease in R&D expense was
primarily due to decreased variable incentive pay due to a decline in operating
performance, partially offset by increased investment in developing new product
platforms to drive future growth.
R&D expense for the six months ended December 31, 2011 increased $2.6 million,
or 2.2%, to $119.2 million from $116.6 million compared to the same period a
year ago. As a percentage of revenue, R&D expense increased to 14.3% compared
to 13.3% in the same period a year ago. The dollar increase in R&D expense was
primarily due to increased investment in developing new product platforms to
drive future growth, partially offset by decreased variable incentive pay due to
a decline in operating performance.
We believe that investment in R&D is critical to attaining our strategic
objectives. Historically, we have devoted significant engineering resources to
assist with production, quality and delivery challenges which can impact our new
product development activities. We plan to continue to invest in R&D and new
products that will further differentiate us in the marketplace.
Selling, General and Administrative ("SG&A")
SG&A expense for the three months ended December 31, 2011 decreased $3.5
million, or 3.2%, to $106.0 million from $109.5 million compared to the same
period a year ago. As a percentage of revenue, SG&A expense increased to 25.7%
compared to 23.1% in the same period a year ago. The dollar decrease in SG&A
expense was primarily due to decreased variable incentive pay due to a decline
in operating performance and lower sales commissions due to decreased revenues,
partially offset by increased stock based compensation.
SG&A expense for the six months ended December 31, 2011 increased $0.5 million,
or 0.2%, to $217.2 million from $216.7 million compared to the same period a
year ago. As a percentage of revenue, SG&A expense increased to 26.1% compared
to 24.7% in the same period a year ago. The dollar increase in SG&A expense was
primarily due to expenses related to a litigated matter in the first quarter of
fiscal 2012 and increased stock based compensation, partially offset by
decreased variable incentive pay due to a decline in operating performance and
lower sales commissions due to decreased revenues.
We intend to continue to focus on reducing our SG&A expenses as a percentage of
revenue. We have in the recent past experienced, and may continue to experience
in the future, certain non-core expenses, such as mergers and acquisitions
related expenses and legal expenses in connection with litigation, which could
increase our SG&A expenses and potentially impact our profitability expectations
in any particular quarter. We are also increasing SG&A expenses in the near term
to upgrade business infrastructure and systems.
Restructuring and Related Charges
We continue to take advantage of opportunities to further reduce costs through
targeted restructuring efforts intended to consolidate and rationalize business
functions and related locations based on core competencies and cost
efficiencies, to align the business in response to the market conditions. We
estimate annual cost savings of approximately $33.2 million as a result of the
restructuring activities initiated in fiscal 2011 and the six months ended
December 31, 2011. See "Note 11. Restructuring and Related Charges" for more
detail.
As of December 31, 2011, our total restructuring accrual was $9.3 million.
During the three and six months ended December 31, 2011, we incurred
restructuring expenses of $4.0 million and $5.5 million, respectively. During
the three and six months ended January 1, 2011, we incurred restructuring
expenses of $2.5 million and $2.8 million, respectively.
During the second quarter of fiscal 2012, we recorded $4.0 million in
restructuring and related charges. The charges are a combination of new and
previously announced restructuring plans and are primarily a result of the
following:
† We approved a plan to re-organize the Customer Experience Management
(CEM) business of CommTest to improve business efficiencies with greater focus
on the mobility and video software test business, as well as the CommTest global
operations to move to a full outsourcing model with initiative to lower costs.
As a result, a restructuring charge of $1.8 million was recorded towards
severance and employee benefits for approximately 65 employees in manufacturing,
research and development and selling, general and administrative functions. As
of December 31, 2011, 18 employees have been terminated. The employees being
affected are located in North America, Europe and Asia. Payments related to
remaining severance and benefits accrual are expected to be paid by the end of
fourth quarter of fiscal 2012.
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--------------------------------------------------------------------------------† We approved a plan in the current quarter to consolidate workspace in
Germantown, Maryland, primarily used by CommTest, and exited the workspace
during the quarter. We accrued $0.6 million exit costs in accordance with
authoritative guidance related to lease and contract terminations.
† In the current quarter, we exited all the facilities under the
CommTest Market Rebalancing Restructuring Plan approved by the management in the
third quarter of fiscal 2011. We accrued $0.9 million exit costs in accordance
with authoritative guidance related to lease and contract terminations.
During the second quarter of fiscal 2011, we recorded $2.5 million in
restructuring and related charges. The charges are a continuation of the
previously announced restructuring plans and consist primarily of the following:
(i) $0.4 million for severance and benefits primarily in the CommTest segment
and primarily relates to the continued implementation of the CommTest Germany
Restructuring Pan; (ii) $0.9 million for manufacturing transfer costs primarily
in the CCOP segment and CommTest segment which were the result of production
site closures in the US, the transfer of certain production processes into
existing sites in U.S. or to contract manufacturers, and the reduction in force
of our manufacturing support organization across all sites; and (iii) $1.2
million primarily due to additional lease exit cost based on current market
conditions in the CCOP segment which was the result of our continued efforts to
reduce and/or consolidate manufacturing locations.
During the six months ended December 31, 2011, we recorded $5.5 million in
restructuring and related charges. The charges are a combination of new and
continuation of the previously announced restructuring plans and are primarily
of the following: (i) $2.5 million consisting of $3.4 million severance and
benefits primarily towards the Commtest Solutions Business Restructuring Plan
announced in current quarter, CCOP segment restructuring plan announced in the
first quarter of fiscal 2012, and continued implementation of the CommTest
Germany Restructuring Plan, offset by a benefit of $0.9 million arising
primarily to adjust the accrual for restructuring plans announced in the third
and fourth quarters of fiscal 2011 in the CommTest segment that did not
materialize due to managements decision to re-locate employees and realize
co-location efficiencies; (ii) $1.4 million for manufacturing transfer costs in
the Commtest and AOT segment which were the result of the transfer of certain
production processes into existing sites in the U.S. or to contract
manufacturers; (iii) $1.7 million lease exit costs from exiting three of the
facilities under the CommTest Market Rebalancing Plan announced in the third
quarter of fiscal 2011 and the CommTest workspace in Germantown, Maryland.
During the six months ended January 1, 2011, we recorded $2.8 million in
restructuring and related charges. The charges are primarily of the following:
(i) $0.6 million for severance and benefits primarily towards the continued
implementation of the CommTest Germany Restructuring Plan; (ii) $1.7 million for
manufacturing transfer costs primarily in the CCOP segment and CommTest segment
which were the result of production site closures in the US, the transfer of
certain production processes into existing sites in U.S. or to contract
manufacturers, and the reduction in force of our manufacturing support
organization across all sites; and (iii) $0.5 million primarily due to
additional lease exit costs of $1.2 million in the CCOP segment, offset by a
benefit of $0.7 million to adjust the accrual for previously restructured leases
in the CommTest segment. The costs incurred were the result of our continued
efforts to reduce and/or consolidate manufacturing locations.
Our ability to generate sublease income, as well as our ability to terminate
lease obligations and recognize the anticipated related savings, is highly
dependent upon the economic conditions, particularly commercial real estate
market conditions in certain geographies, at the time we negotiate the lease
termination and sublease arrangements with third parties as well as the
performances by such third parties of their respective obligations. While the
amount we have accrued represents the best estimate of the remaining obligations
we expect to incur in connection with these plans, estimates are subject to
change. Routine adjustments are required and may be required in the future as
conditions and facts change through the implementation period. Our restructuring
and other lease exit cost obligations are net of sublease income or lease
settlement estimates of approximately $4.2 million. If adverse macroeconomic
conditions continue, particularly as they pertain to the commercial real estate
market, or if, for any reason, tenants under subleases fail to perform their
obligations, we may be required to reduce estimated future sublease income and
adjust the estimated amounts of future settlement agreements, and accordingly,
increase estimated costs to exit certain facilities. Amounts related to the
lease expense, net of anticipated sublease proceeds, will be paid over the
respective lease terms through fiscal 2019.
Interest and Other Income (Expense), Net
During the three months ended December 31, 2011, interest and other income
(expense), net decreased $0.6 million to income of $0.9 million from income of
$1.5 million during the same period a year ago.
During the six months ended December 31, 2011, interest and other income
(expense), net decreased $1.0 million to income of $0.8 million from income of
$1.8 million during the same period a year ago.
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Interest Expense
During the three months ended December 31, 2011, interest expense increased $0.2
million to $6.6 million from $6.4 million during the same period a year ago. The
increase was primarily due to an increase in amortized debt discount cost.
During the six months ended December 31, 2011, interest expense increased $0.5
million to $13.2 million from $12.7 million during the same period a year ago.
The increase was primarily due to an increase in amortized debt discount cost.
Provision for Income Tax
We recorded an income tax expense of $3.0 million and $6.4 million for the three
months and six months ended December 31, 2011, respectively. We recorded an
income tax expense of $5.2 million and $3.1 million for the three and six months
ended January 1, 2011, respectively.
The income tax expense recorded for the three and six months ended December 31,
2011, primarily relates to income tax in certain foreign and state jurisdictions
based on our forecasted pre-tax income for the year in those locations. The
income tax expense recorded for the three and six months ended January 1, 2011,
primarily relates to income tax in certain foreign and state jurisdictions based
our forecasted pre-tax income for the respective year in those locations. The
income tax expense for the three and six months ended January 1, 2011 includes
the recognition of $0.7 and $5.2 million respectively of uncertain tax benefits
relating to the effective settlement of tax matters in non-US jurisdictions.
The income tax expense recorded differs from the expected tax expense or benefit
that would be calculated by applying the federal statutory rate to our income or
loss before income taxes primarily due to the increases in valuation allowance
for deferred tax assets attributable to our domestic and foreign losses from
continuing operations.
As of December 31, 2011 and July 2, 2011 our unrecognized tax benefits totaled
$60.6 million and $64.0 million, respectively, and are included in deferred
taxes and other non-current tax liabilities, net. We had $22.3 million accrued
for the payment of interest and penalties at December 31, 2011.
Operating Segment Information (in millions)
Three Months Ended Six Months Ended
December 31, January 1, Percentage December 31, January 1, Percentage
2011 2011 Change Change 2011 2011 Change Change
CommTest
Net
revenue $ 195.9 $ 227.7 $ (31.8 ) (14.0 )% $ 380.8 $ 404.4 $ (23.6 ) (5.8 )%
Operating
income 28.0 44.8 (16.8 ) (37.5 )% 52.1 66.4 (14.3 ) (21.5 )%
CCOP
Net
revenue 163.2 191.1 (27.9 ) (14.6 )% 343.5 359.1 (15.6 ) (4.3 )%
Operating
income 16.6 34.0 (17.4 ) (51.2 )% 42.2 58.2 (16.0 ) (27.5 )%
AOT
Net
revenue 53.7 54.7 (1.0 ) (1.8 )% 109.3 115.2 (5.9 ) (5.1 )%
Operating
income 16.5 17.7 (1.2 ) (6.8 )% 33.9 39.8 (5.9 ) (14.8 )%
The decrease in operating income for the CommTest segment during the three and
six months ended December 31, 2011 compared to the same periods a year ago, was
due to a decline in sales as a result of uncertainty in the macro-economic
environment which reduced carriers' spending in Europe and North America, paired
with unfavorable product mix.
The decrease in operating income for the CCOP segment during the three and six
months ended December 31, 2011 compared to the same periods a year ago, was due
to lower revenue in both the optical communications and laser product
portfolios, higher production variances as a result of flooding in Thailand
which temporarily suspended operations of Fabrinet, one of CCOP's primary
manufacturing partners, and an increase in R&D operating expense.
32
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The decrease in operating income for the AOT segment during the three and six
months ended December 31, 2011 compared to the same periods a year ago, was due
to unfavorable manufacturing variances and higher operating expenses in both the
three and six month periods, paired with reduced revenue specific to the six
month period.
Liquidity and Capital Resources
Our investments of surplus cash are made in accordance with an investment policy
approved by the Audit Committee of our Board of Directors. In general, our
investment policy requires that securities purchased be rated A-1/P-1, A/A2 or
better. Securities that are downgraded subsequent to purchase are evaluated and
may be sold or held at management's discretion. No security may have an
effective maturity that exceeds 37 months, and the average duration of our
holdings may not exceed 18 months. At any time, no more than 5% of the
investment portfolio may be concentrated in a single issuer other than the U.S.
government or U.S. agencies. Our investments in debt securities and marketable
equity securities are primarily classified as available-for-sale investments or
trading assets and are recorded at fair value. The cost of securities sold is
based on the specific identification method. Unrealized gains and losses on
available-for-sale investments are reported as a separate component of
stockholders' equity. We did not hold any investments in auction rate
securities, mortgage backed securities, collateralized debt obligations, or
variable rate demand notes at December 31, 2011 and virtually all debt
securities held were of investment grade (at least BBB-/Baa3). As of
December 31, 2011, approximately 84.1% of our cash and cash equivalents,
short-term investments, and restricted cash were held in the U.S.
As of December 31, 2011, the majority of our investments of surplus cash have
maturities of 90 days or less and are of high credit quality. Although we
intend to hold these investments to maturity, in the event that we are required
to sell any of these securities under adverse market conditions, losses could be
recognized on such sales. During the six months ended December 31, 2011, we have
not realized material investment losses but can provide no assurance that the
value or the liquidity of our other investments will not be impacted by adverse
conditions in the financial markets. In addition, we maintain cash balances in
operating accounts that are with third party financial institutions. These
balances in the U.S. may exceed the Federal Deposit Insurance Corporation
("FDIC") insurance limits. While we monitor the cash balances in our operating
accounts and adjust the cash balances as appropriate, these cash balances could
be impacted if the underlying financial institutions fail.
As of December 31, 2011, we had a combined balance of cash and cash equivalents,
short-term investments and restricted cash of $755.6 million, an increase of
$26.9 million from July 2, 2011. Cash and cash equivalents increased by $19.8
million in the six months ended December 31, 2011, primarily due to cash
generated by operating activities of $68.6 million and financing activities of
$6.3 million, offset by $40.8 million used for the purchases of property, plant
and equipment, net cash outflows of $9.7 million used for the purchase of
available-for-sale investments and $3.7 million used for the acquisition of
QuantaSol.
During the six months ended December 31, 2011, cash provided by operating
activities was $68.6 million, resulting from our net income adjusted for
non-cash items such as depreciation, amortization and stock-based compensation
of $98.8 million, and changes in operating assets and liabilities that used
$30.2 million related primarily to a decrease in accounts payable of $21.8
million, an increase in inventories of $19.6 million, a decrease in accrued
payroll and related expenses of $13.0 million, a decrease in deferred revenue of
$9.6 million, and an increase in other current and non-current assets of $6.7
million, offset by a decrease in accounts receivable of $38.8 million primarily
driven by seasonality of our collection activities.
During the six months ended January 1, 2011, cash provided by operating
activities was $96.4 million, resulting from our net income adjusted for
non-cash items such as depreciation, amortization and stock-based compensation
of $127.4 million, and changes in operating assets and liabilities that used
$31.0 million related primarily to an increase in accounts receivable of $63.7
million due to a significant increase of revenue in the last month of the fiscal
quarter and an increase in inventories of $16.6 million, offset by an increase
in deferred revenue of $27.0 million, an increase in accrued payroll and related
expenses of $13.4 million, and an increase in accounts payable of $7.4 million
due to increased inventory level as a result of business growth.
During the six months ended December 31, 2011 cash used for investing activities
was $50.3 million, primarily related to cash used for the purchase of property,
plant and equipment of $40.8 million, net cash outflows used for the purchase of
available-for-sale investments of $9.7 million, and cash used for the
acquisition of QuantaSol of $3.7 million, offset by proceeds from the sale of
assets of $2.1 million primarily from the Eningen transaction. Since we continue
to invest in new technology, laboratory equipment, and manufacturing capacity to
support revenue growth opportunities across all three segments, investments were
made during the six months ended December 31, 2011 to increase manufacturing
capacity in Asia and the U.S., to set up and improve facilities, and to upgrade
information technology systems.
Investing activities for six months ended January 1, 2011 used $36.2 million,
primarily related to cash used for the purchase of property, plant and equipment
of $51.6 million offset by the net proceeds from sales and maturities of
investments of $15.1 million. Since we continue to invest in new technology,
laboratory equipment, and manufacturing capacity to support revenue growth
across all three segments, significant investments were made during the six
months ended January 1, 2011 to increase our manufacturing
33
--------------------------------------------------------------------------------capacity in Asia and the U.S., to set up and/or improve facilities and purchase
equipment to support our newly-acquired NSD business, and to upgrade our
information technology systems and initiatives.
During the six months ended December 31, 2011, cash provided by financing
activities was $6.3 million, related to proceeds from the exercise of stock
options and the issuance of common stock under our employee stock purchase plan
of $7.0 million and proceeds from financing obligation of $6.9 million related
to the Eningen transaction, offset by payments made on financing obligations of
$7.6 million.
During the six months ended January 1, 2011, cash provided by financing
activities was $4.7 million, primarily related to proceeds from the exercise of
stock options and the issuance of common stock under our employee stock purchase
plan of $8.7 million, offset by payments made on financing obligations of $3.8
million.
We believe that our existing cash balances, investments and availability under
our revolving credit facility (refer to "Note 18. Subsequent Events" for more
details on the revolving credit facility), will be sufficient to meet our
liquidity and capital spending requirements at least through the next 12 months.
However, there are a number of factors that could positively or negatively
impact our liquidity position, including:
† global economic conditions which affect demand for our products and
services and impact the financial stability of our suppliers and customers;
† changes in accounts receivable, inventory or other operating assets
and liabilities which affect our working capital;
† increase in capital expenditure to support the revenue growth
opportunity of our business;
† the tendency of customers to delay payments or to negotiate favorable
payment term to manage their own liquidity positions;
† timing of payments to our suppliers;
† factoring or sale of accounts receivable;
† volatility in fixed income, credit, and foreign exchange markets
which impact the liquidity and valuation of our investment portfolios;
† possible investments or acquisitions of complementary businesses,
products or technologies;
† issuance or repurchase of debt or equity securities;
† potential funding of pension liability either voluntarily or as
required by law or regulation; and
† compliance with covenants and other terms and conditions related to
our financing arrangements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, other than the guarantees
discussed in "Note 16. Commitments and Contingencies."
Employee Stock-based Benefit Plans
Our stock-based benefit plans are a broad-based, long-term retention program
that is intended to attract and retain employees and align stockholder and
employee interests. See "Note 13. Stock-Based Compensation" for more detail.
Pension and Other Postretirement Benefits
We sponsor pension plans for certain past and present employees in the U.K. and
Germany. JDSU also is responsible for the non-pension postretirement benefit
obligation of a previously acquired subsidiary. Most of these plans have been
closed to new participants and no additional service costs are being accrued,
except for the plans assumed during fiscal 2010 in connection with the NSD
acquisition. The U.K. plan is partially funded and the German plans, which were
established as "pay-as-you-go" plans, are unfunded. The authoritative guidance
requires the recognition of the funded status of the pension plans and
non-pension postretirement benefit plans (retirement-related benefit plans) as
an asset or a liability in the Consolidated Balance Sheet. The authoritative
guidance also requires the recognition of changes in that funded status in the
year in which they occur through the gains and (losses) not affecting retained
earnings, net of tax, and the recognition of previously unrecognized
gains/(losses), prior service costs/(credits) and transition assets as a
component of Accumulated gains and (losses) not affecting retained earnings. The
funded status of a retirement plan is the difference between the projected
benefit obligation and the fair value of its plan assets. The projected benefit
obligation is the actuarial present value of all benefits attributed by the
plan's benefit formula to employee service. At December 31, 2011, our pension
plans were under funded by $76.7 million since the projected benefit obligation
exceeded the fair value of its plan assets. Similarly, we had a liability of
$0.9 million related to our non-pension postretirement benefit plan. Pension
34
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plan assets are managed professionally and we monitor the performance of our
investment managers. As of December 31, 2011, the value of plan assets had
increased approximately 1.2% since July 2, 2011, our most recent fiscal year
end.
A key actuarial assumption is the discount rate. Changes in the discount rate
impact the interest cost component of the net periodic benefit cost calculation
and, due to the fact that the accumulated benefit obligation ("ABO") is
calculated on a net present value basis, changes in the discount rate will also
impact the current ABO. Decreases in the discount rate will generally increase
pre-tax cost, recognized expense and the ABO. Increases in the discount rate
tend to have the opposite effect. We estimate a 50 basis point decrease or
increase in the discount rate would cause a corresponding increase or decrease,
respectively, in the ABO of approximately $6.0 million based upon July 2, 2011
data.
In estimating the expected return on plan assets, we consider historical returns
on plan assets, adjusted for forward-looking considerations, inflation
assumptions and the impact of the active management of the plan's invested
assets. While it is not possible to accurately predict future rate movements, we
believe our current assumptions are appropriate. Please refer to "Note 14.
Employee Defined Benefit Plans" for further discussion.
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