Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - VIAVI SOLUTIONS INC. | viavq3fy1610qa4-ex322.htm |
| EX-32.1 - EXHIBIT 32.1 - VIAVI SOLUTIONS INC. | viavq3fy1610qa3-ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - VIAVI SOLUTIONS INC. | viavq3fy1610qa2-ex312.htm |
| EX-31.1 - EXHIBIT 31.1 - VIAVI SOLUTIONS INC. | viavq3fy1610qa1-ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2016
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from | to | |||||
Commission File Number 0-22874
Viavi Solutions Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 94-2579683 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
430 North McCarthy Boulevard, Milpitas, California 95035
(Address of principal executive offices including Zip code)
(408) 404-3600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | o | Non-accelerated filer (Do not check if a smaller reporting company) | o | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of April 30, 2016 the Registrant had 232,516,228 shares of common stock outstanding.
EXPLANATORY NOTE
Viavi Solutions Inc. (“Viavi,” also referred to as “the Company,” “we,” “our,” and “us”) is filing this report on Form 10-Q/A to restate the included unaudited interim consolidated financial statements because the Audit Committee of the Board of Directors (the “Audit Committee”) and the management of the Company, after discussions with the Company’s independent registered public accounting firm PricewaterhouseCoopers LLP (“PwC”), concluded on August 10, 2016, that the Company’s previously issued unaudited interim consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q for the periods ended October 3, 2015, January 2, 2016 and April 2, 2016, should no longer be relied upon because of an error in the Company’s determination of its interim income tax provision under generally accepted accounting principles related to a foreign jurisdiction.
During the preparation of the Company’s fiscal 2016 Annual Report on Form 10-K, management determined that an error was made in the Company’s calculation of its previously reported interim income tax expense which resulted in: (a) an understatement of income tax expense of $2.1 million for the three months ended October 3, 2015, (b) an understatement of income tax expense of $2.3 million for the three months ended January 2, 2016, (c) a cumulative understatement of income tax expense of $4.4 million for the six months ended January 2, 2016, (d) an overstatement of income tax expense of $1.4 million for the three months ended April 2, 2016, and (e) a cumulative understatement of income tax expense of $3.0 million for the nine months ended April 2, 2016.
As a result of the overstatement of interim income tax expense by $1.4 million for the three months ended April 2, 2016 and a cumulative understatement of $3.0 million for the nine months ended April 2, 2016, the Company’s net income was understated by $1.4 million for the three months ended April 2, 2016 and the net loss was understated by $3.0 million for the nine months ended April 2, 2016.
On August 10, 2016, the Audit Committee approved management’s recommendation that the Company restate its unaudited interim consolidated financial statements for the three and nine months ended April 2, 2016, by filing on this Form 10-Q/A an amendment to the originally filed Form 10-Q. The Company filed an Item 4.02 Current Report on Form 8-K on August 11, 2016, relating to this matter.
In connection with the restatement the Company has also identified a material weakness in internal controls over financial reporting and concluded that its disclosure controls and procedures were not effective as of the end of the period covered by the originally filed Form 10-Q. The Company will take steps to remediate the material weakness associated with the determination of the interim income tax provision misstatement. For more information on the material weakness and its remediation efforts, please see “Item 4 - Controls and Procedures” of this Form 10-Q/A.
This report on Form 10-Q/A restates in its entirety the originally filed Form 10-Q. The following sections of the originally filed Form 10-Q have been restated:
(1) | Item 1 of Part I, Financial Statements |
(2) | Item 2 of Part I, Management’s Discussion and Analysis of Financial Condition and Results of Operations |
(3) | Item 4 of Part I, Controls and Procedures |
The Company has also restated the signature page, the certifications of our Chief Executive Officer and Chief Financial Officer in Exhibits 31.1, 31.2, 32.1, and 32.2 and the financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibits 101. No other sections were affected.
For more information about the restatement, please refer to the Company’s Current Report on Form 8-K (Item 4.02) filed on August 11, 2016.
TABLE OF CONTENTS | Page | ||
1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
April 2, 2016 (Restated) | March 28, 2015 | April 2, 2016 (Restated) | March 28, 2015 | ||||||||||||
Revenues: | |||||||||||||||
Product revenue | $ | 198.5 | $ | 186.6 | $ | 607.1 | $ | 574.1 | |||||||
Service revenue | 21.9 | 25.8 | 75.1 | 80.0 | |||||||||||
Total net revenues | 220.4 | 212.4 | 682.2 | 654.1 | |||||||||||
Cost of revenues: | |||||||||||||||
Product cost of revenues | 70.5 | 62.0 | 209.6 | 190.3 | |||||||||||
Service cost of revenues | 14.5 | 14.4 | 46.0 | 48.5 | |||||||||||
Amortization of acquired technologies | 4.1 | 9.0 | 13.0 | 26.3 | |||||||||||
Total cost of revenues | 89.1 | 85.4 | 268.6 | 265.1 | |||||||||||
Gross profit | 131.3 | 127.0 | 413.6 | 389.0 | |||||||||||
Operating expenses: | |||||||||||||||
Research and development | 40.0 | 42.1 | 126.0 | 127.9 | |||||||||||
Selling, general and administrative | 80.6 | 95.5 | 261.3 | 285.2 | |||||||||||
Amortization of other intangibles | 3.6 | 4.8 | 11.1 | 14.7 | |||||||||||
Restructuring and related charges | (0.1 | ) | 7.8 | 1.7 | 18.0 | ||||||||||
Total operating expenses | 124.1 | 150.2 | 400.1 | 445.8 | |||||||||||
Income (loss) from operations | 7.2 | (23.2 | ) | 13.5 | (56.8 | ) | |||||||||
Interest and other income (expense), net | 0.8 | 0.3 | 1.4 | 1.2 | |||||||||||
Gain on sale of investments | 39.8 | 0.1 | 39.8 | 0.1 | |||||||||||
Interest expense | (9.1 | ) | (8.2 | ) | (26.7 | ) | (24.7 | ) | |||||||
Income (loss) from continuing operations before taxes | 38.7 | (31.0 | ) | 28.0 | (80.2 | ) | |||||||||
Provision for income taxes | 9.9 | 4.8 | 13.9 | 19.1 | |||||||||||
Income (loss) from continuing operations, net of taxes | $ | 28.8 | $ | (35.8 | ) | $ | 14.1 | $ | (99.3 | ) | |||||
Income (loss) from discontinued operations, net of taxes | 5.0 | 22.6 | (45.4 | ) | 51.3 | ||||||||||
Net income (loss) | $ | 33.8 | $ | (13.2 | ) | $ | (31.3 | ) | $ | (48.0 | ) | ||||
Net income (loss) per share from - basic: | |||||||||||||||
Continuing operations | $ | 0.13 | $ | (0.16 | ) | $ | 0.06 | $ | (0.43 | ) | |||||
Discontinued operations | 0.02 | 0.10 | (0.19 | ) | 0.22 | ||||||||||
Net income (loss) | $ | 0.15 | $ | (0.06 | ) | $ | (0.13 | ) | $ | (0.21 | ) | ||||
Net income (loss) per share from - diluted: | |||||||||||||||
Continuing operations | $ | 0.12 | $ | (0.16 | ) | $ | 0.06 | $ | (0.43 | ) | |||||
Discontinued operations | 0.02 | 0.10 | (0.19 | ) | 0.22 | ||||||||||
Net income (loss) | $ | 0.14 | $ | (0.06 | ) | $ | (0.13 | ) | $ | (0.21 | ) | ||||
Shares used in per-share calculation - basic | 232.0 | 233.2 | 234.4 | 232.1 | |||||||||||
Shares used in per-share calculation - diluted | 234.6 | 233.2 | 237.4 | 232.1 | |||||||||||
See accompanying notes to consolidated financial statements.
2
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
April 2, 2016 (Restated) | March 28, 2015 | April 2, 2016 (Restated) | March 28, 2015 | ||||||||||||
Net income (loss) | $ | 33.8 | $ | (13.2 | ) | $ | (31.3 | ) | $ | (48.0 | ) | ||||
Other comprehensive income (loss): | |||||||||||||||
Net change in cumulative translation adjustment, net of tax | 3.4 | (27.1 | ) | (18.4 | ) | (63.0 | ) | ||||||||
Net change in available-for-sale investments, net of tax: | |||||||||||||||
Unrealized holding gains (losses) arising during period | 48.5 | 0.1 | 201.6 | (0.4 | ) | ||||||||||
Less: reclassification adjustments included in Net income (loss) | (38.8 | ) | — | (38.8 | ) | — | |||||||||
Net change in defined benefit obligation, net of tax: | |||||||||||||||
Amortization of actuarial losses | 0.2 | 0.1 | 0.5 | 0.4 | |||||||||||
Net change in Accumulated other comprehensive income (loss) | 13.3 | (26.9 | ) | 144.9 | (63.0 | ) | |||||||||
Comprehensive income (loss) | $ | 47.1 | $ | (40.1 | ) | $ | 113.6 | $ | (111.0 | ) | |||||
See accompanying notes to consolidated financial statements.
3
VIAVI SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and par value data)
(unaudited)
April 2, 2016 (Restated) | June 27, 2015 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 437.1 | $ | 334.5 | |||
Short-term investments | 555.8 | 464.9 | |||||
Restricted cash | 12.1 | 26.2 | |||||
Accounts receivable, net (Note 6) | 151.9 | 152.3 | |||||
Inventories, net | 52.5 | 53.8 | |||||
Prepayments and other current assets | 34.7 | 38.2 | |||||
Current assets of discontinued operations | — | 310.2 | |||||
Total current assets | 1,244.1 | 1,380.1 | |||||
Property, plant and equipment, net | 134.4 | 149.2 | |||||
Goodwill | 245.3 | 255.5 | |||||
Intangibles, net | 69.4 | 90.6 | |||||
Deferred income taxes | 113.0 | 117.3 | |||||
Other non-current assets | 18.6 | 20.9 | |||||
Non-current assets of discontinued operations | — | 204.2 | |||||
Total assets | $ | 1,824.8 | $ | 2,217.8 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 39.9 | $ | 42.0 | |||
Accrued payroll and related expenses | 46.2 | 52.6 | |||||
Income taxes payable | 17.5 | 3.1 | |||||
Deferred revenue | 87.9 | 80.6 | |||||
Accrued expenses | 27.3 | 23.7 | |||||
Other current liabilities | 17.7 | 43.5 | |||||
Current liabilities of discontinued operations | — | 130.0 | |||||
Total current liabilities | 236.5 | 375.5 | |||||
Long-term debt | 581.5 | 561.6 | |||||
Other non-current liabilities | 172.4 | 168.4 | |||||
Non-current liabilities of discontinued operations | — | 10.9 | |||||
Commitments and contingencies (Note 16) | |||||||
Stockholders’ equity: | |||||||
Preferred Stock, $0.001 par value; 1 million shares authorized; 1 share at April 2, 2016 and June 27, 2015, issued and outstanding | — | — | |||||
Common Stock, $0.001 par value; 1 billion shares authorized; 232 million shares at April 2, 2016 and 235 million shares at June 27, 2015, issued and outstanding | 0.2 | 0.2 | |||||
Additional paid-in capital | 70,051.6 | 70,022.7 | |||||
Accumulated deficit | (69,306.5 | ) | (68,873.5 | ) | |||
Accumulated other comprehensive income (loss) | 89.1 | (48.0 | ) | ||||
Total stockholders’ equity | 834.4 | 1,101.4 | |||||
Total liabilities and stockholders’ equity | $ | 1,824.8 | $ | 2,217.8 | |||
See accompanying notes to consolidated financial statements.
4
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Nine Months Ended | |||||||
April 2, 2016 (Restated) | March 28, 2015 | ||||||
OPERATING ACTIVITIES: | |||||||
Net loss | $ | (31.3 | ) | $ | (48.0 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||
Depreciation expense | 29.8 | 60.3 | |||||
Amortization of acquired technologies and other intangibles | 24.7 | 47.0 | |||||
Stock-based compensation | 35.6 | 50.3 | |||||
Amortization of debt issuance costs and accretion of debt discount | 21.4 | 20.4 | |||||
Amortization of discount and premium on investments, net | 0.9 | 2.7 | |||||
Gain on sale of investments | (39.8 | ) | (0.1 | ) | |||
Other | 1.3 | 4.6 | |||||
Changes in operating assets and liabilities, net of impact of Lumentum distribution: | |||||||
Accounts receivable | 22.6 | (14.3 | ) | ||||
Inventories | (2.2 | ) | (6.7 | ) | |||
Other current and non-currents assets | 3.7 | (5.2 | ) | ||||
Accounts payable | (8.4 | ) | (17.6 | ) | |||
Income taxes payable | 11.3 | (15.6 | ) | ||||
Deferred revenue, current and non-current | 8.1 | 2.4 | |||||
Deferred taxes, net | 7.6 | 13.6 | |||||
Accrued payroll and related expenses | (22.0 | ) | (38.7 | ) | |||
Accrued expenses and other current and non-current liabilities | (28.3 | ) | (20.6 | ) | |||
Net cash provided by operating activities | 35.0 | 34.5 | |||||
INVESTING ACTIVITIES: | |||||||
Purchases of available-for-sale investments | (334.1 | ) | (460.0 | ) | |||
Maturities of available-for-sale investments | 330.1 | 450.2 | |||||
Sales of available-for-sale investments | 217.3 | 69.5 | |||||
Changes in restricted cash | 14.1 | 5.0 | |||||
Capital expenditures | (26.6 | ) | (68.7 | ) | |||
Proceeds from the sale of assets | 5.0 | 5.2 | |||||
Acquisition of a business | (0.9 | ) | — | ||||
Net cash provided by investing activities | 204.9 | 1.2 | |||||
FINANCING ACTIVITIES: | |||||||
Proceeds from sale of Lumentum Holdings Inc. Series A Preferred Stock | 35.8 | — | |||||
Cash contribution to Lumentum Holdings Inc. | (137.0 | ) | — | ||||
Repurchase and retirement of common stock | (40.0 | ) | (4.7 | ) | |||
Payment of financing obligations | (5.7 | ) | (23.1 | ) | |||
Proceeds from exercise of employee stock options and employee stock purchase plan | 3.0 | 14.0 | |||||
Net cash used in financing activities | (143.9 | ) | (13.8 | ) | |||
Effect of exchange rates on cash and cash equivalents | (6.8 | ) | (19.9 | ) | |||
Net increase in cash and cash equivalents | 89.2 | 2.0 | |||||
Cash and cash equivalents at the beginning of the period | 347.9 | * | 297.2 | ||||
Cash and cash equivalents at the end of the period | $ | 437.1 | $ | 299.2 | |||
*Cash and cash equivalents at June 27, 2015 included $13.4 million in current assets of the discontinued operations of Lumentum Holdings Inc.
See accompanying notes to consolidated financial statements.
5
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Note 1. Basis of Presentation (Restated)
The financial information for Viavi Solutions Inc. (“Viavi” also referred to as “the Company”, “we”, “our” and “us”) as of April 2, 2016 and for the three and nine months ended April 2, 2016 and March 28, 2015 is unaudited, and includes all normal and recurring adjustments Company management (“Management”) considers necessary for a fair statement of the financial information set forth herein, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 27, 2015.
The balance sheet as of June 27, 2015 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The results for the three and nine months ended April 2, 2016 and March 28, 2015 may not be indicative of results for the year ending July 2, 2016 or any future periods.
Fiscal Years
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to June 30th. The Company’s fiscal 2016 is a 53-week year ending on July 2, 2016. The Company’s fiscal 2015 was a 52-week year ending on June 27, 2015.
Lumentum Separation
On August 1, 2015 (the “Separation Date”), Viavi, formerly known as JDS Uniphase Corporation (“JDSU”), completed the distribution of approximately 80.1% of the outstanding shares of Lumentum Holdings Inc. (“Lumentum”) common stock (the “Distribution”). Concurrent with the Distribution, JDSU was renamed Viavi Solutions Inc. and, at the time of the Distribution, retained ownership of approximately 19.9% of Lumentum’s outstanding shares. Lumentum was formed to hold Viavi’s communications and commercial optical products business segment (“CCOP”) and the WaveReady product line and, as a result of the Distribution, is now an independent public company trading under the symbol “LITE” on The Nasdaq Stock Market (“NASDAQ”). The Distribution was made to Viavi’s stockholders of record as of the close of business on July 27, 2015 (the “Record Date”), who received one share of Lumentum common stock for every five shares of Viavi common stock held as of the close of business on the Record Date and not sold prior to August 4, 2015, the ex-dividend date. The historical results of operations and the financial position have been recasted to present the Lumentum business as discontinued operations as described in “Note 3. Discontinued Operations.” Unless noted otherwise, discussion in the Notes to Consolidated Financial Statements pertain to continuing operations.
Principles of Consolidation
The amounts presented in the consolidated financial statements have been prepared in accordance with U.S. GAAP and include the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the reported amount of Net revenues and expenses and the disclosure of commitments and contingencies during the reporting periods. The Company bases estimates on historical experience and on various assumptions about the future believed to be reasonable based on available information. The Company’s reported financial position or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies. If estimates or assumptions differ from actual results, subsequent periods are adjusted to reflect more current information.
Restatement of Financial Statements
The Company has restated these unaudited interim consolidated financial statements for the correction of an error. Refer to “Note 18. Restatement of Previously Issued Financial Statements” for more details and required disclosures.
6
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 2. Recently Issued Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued guidance which simplifies several aspects of accounting for share-based payment award transactions including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for the Company in the first quarter of fiscal 2018 and earlier adoption is permitted. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
In March 2016, the FASB issued guidance that clarifies the steps required when assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to the economic characteristics and risks of their debt instrument. The guidance is effective for the Company in the first quarter of fiscal 2018. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
In February 2016, the FASB issued guidance related to how an entity should recognize lease assets and lease liabilities. The guidance specifies that an entity who is a lessee under lease agreements should recognize lease assets and lease liabilities for those leases classified as operating leases under previous FASB guidance. Accounting for leases by lessors is largely unchanged under the new guidance. The guidance requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The guidance is effective for the Company in the first quarter of fiscal 2020. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
In January 2016, the FASB issued guidance that requires an entity to measure equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, it requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. It also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The guidance is effective for the Company in the first quarter of fiscal 2019. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
In November 2015, the FASB issued guidance requiring deferred tax assets and liabilities, and any related valuation allowance, to be classified as non-current on the balance sheet. This classification eliminates the need to separately identify the net current and net non-current deferred tax asset or liability in each jurisdiction. The Company elected to prospectively adopt the guidance in the beginning of the second quarter of fiscal 2016. Refer to “Note 12. Income Taxes” for more information regarding the impact of adopting this guidance.
In July 2015, the FASB issued guidance to change the subsequent measurement of inventory from lower of cost or market to lower of cost and net realizable value. The guidance is effective for the Company in the first quarter of fiscal 2018. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
In May 2015, the FASB issued guidance to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using net asset value per share practical expedient. The guidance is effective for the Company in the first quarter of fiscal 2017 and may apply to certain pension assets. The guidance will be applied retrospectively and earlier adoption is permitted. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
In April 2015, the FASB issued new authoritative guidance to provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. Prospective application is required and early adoption is permitted. This guidance is effective for the Company in the first quarter of fiscal 2017 and may apply to the qualified and the non-qualified pension plans in certain countries. The Company does not expect the adoption of this standard will have a material effect on the consolidated financial statements.
In April 2015, the FASB issued new authoritative guidance to simplify the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding liability, consistent with debt discounts or premiums. This guidance is effective for the Company in the first quarter of fiscal 2017 for its convertible debt, and will be applied
7
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
retrospectively. The consolidated balance sheet of each individual period presented will be adjusted to reflect the period-specific effects of applying this new guidance.
In May 2014, the FASB issued new authoritative guidance related to revenue recognition. This guidance will replace current U.S. GAAP guidance on this topic and eliminate industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance allows for either full retrospective adoption or modified retrospective adoption. The FASB deferred the effective date for this guidance by one year to December 15, 2017 for annual reporting periods beginning after such date. Earlier application of this guidance is permitted but not before the original date of December 15, 2016. In March, April and May 2016, the FASB clarified the implementation guidance on principal versus agent, identifying performance obligations, licensing, collectibility, noncash consideration, presentation of sales tax, and other transition matters. The new guidance is effective for the Company in the first quarter of fiscal 2019. The Company is evaluating the impact that this new accounting guidance will have on its consolidated financial statements and related disclosures.
Note 3. Discontinued Operations
On August 1, 2015, the Company completed the separation of the Lumentum business (the “Separation”) and made a tax-free distribution of approximately 80.1% of the outstanding shares of Lumentum common stock to Viavi shareholders who received one share of Lumentum common stock for every five shares of Viavi common stock held as of the close of business on July 27, 2015 (the “Record Date”) and not sold prior to August 4, 2015 (the “ex-dividend date”). In connection with the Separation Viavi agreed to contribute $137.6 million of total cash, of which $0.6 million remains to be contributed as of April 2, 2016. As of the Distribution, Viavi retained ownership of approximately 19.9%, or 11.7 million shares, of Lumentum’s outstanding shares. Lumentum was formed to hold Viavi’s CCOP business and the WaveReady product line. As a result of the Distribution, Lumentum is now an independent public company.
In connection with the Separation, the Company entered into a Contribution Agreement, Separation and Distribution Agreement, a Tax Matters Agreement, Employee Matters Agreement, Securities Purchase Agreement, a Supply Agreement, and an Intellectual Property Matters Agreement with Lumentum and others.
The Contribution Agreement identifies the assets to be transferred, the liabilities to be assumed and the contracts to be assigned and it provides for when and how these transfers, assumptions and assignments will occur.
The Separation and Distribution Agreement governs the separation of the CCOP and WaveReady business, the transfer of assets and other matters related to Viavi’s relationship with Lumentum.
The Tax Matters Agreement governs the respective rights, responsibilities and obligations of Lumentum and Viavi with respect to tax liabilities and benefits, tax attributes, tax contests, tax returns, and certain other tax matters.
The Employee Matters Agreement governs the compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of Lumentum and Viavi, and generally allocates liabilities and responsibilities relating to employee compensation, benefit plans and programs. The Employee Matters Agreement provides that employees of Lumentum will no longer participate in benefit plans sponsored or maintained by Viavi.
The Securities Purchase Agreement with the Company, Lumentum and Amada Holdings Co., Ltd. (“Amada”) set forth terms whereby the Company received 40,000 shares of Lumentum’s Series A Preferred Stock (“Series A Preferred Stock”) pursuant to a binding commitment to sell the Series A Preferred Stock to Amada following the Separation. Upon Separation, in connection with the agreement, during the first quarter of fiscal 2016 the Company sold 35,805 shares of the Series A Preferred Stock to Amada for $35.8 million and the remaining 4,195 shares of the Series A Preferred Stock were canceled. The $35.8 million is included as a part of financing activities in the Statement of Cash Flows.
The Supply Agreement outlines that Viavi will supply test equipment to Lumentum and Lumentum will supply components related to the Company’s metro, fiber and optical product lines and development services related to smart transceivers. The most significant component of the Supply Agreement is $15 million related to the sale of certain optical test equipment to Lumentum during the 12 month period from the date of the agreement through July 31, 2016, of which the company recorded $4.4 million and $12.7 million of net revenue during the three and nine months ended April 2, 2016, respectively.
8
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The Intellectual Property Matters Agreement outlines the intellectual property rights and technology transferred to Lumentum upon the Separation, as well as the intellectual property and technology both companies can license from each other. In addition it outlines non-compete restrictions between Viavi and Lumentum.
As the separation of the Lumentum business represents a strategic shift that has and will have a major effect on the Company’s operations and financial results, the results of operations and net assets of the Lumentum business are presented separately as discontinued operations for the three and nine months ended April 2, 2016 and March 28, 2015 and as of June 27, 2015, in accordance with the authoritative guidance.
Lumentum is now a stand-alone public company that separately reports it financial results. Due to the difference between the basis of presentation for discontinued operations and the basis of presentation as a stand-alone company, the financial results of Lumentum included within discontinued operations for the Company may not be indicative of actual financial results of Lumentum as a stand-alone company.
The following table presents the carrying amounts of the major classes of the assets and liabilities of the Lumentum business which are presented as discontinued operation on the Consolidated Balance Sheets (in millions).
June 27, 2015 | |||
Assets: | |||
Cash and cash equivalents | $ | 13.4 | |
Accounts receivable, net | 150.2 | ||
Inventories, net | 100.0 | ||
Prepayments and other current assets | 46.6 | ||
Current assets of discontinued operations | 310.2 | ||
Property, plant and equipment, net | 145.4 | ||
Goodwill | 5.6 | ||
Intangibles, net | 21.8 | ||
Other non-current assets | 31.4 | ||
Non-current assets of discontinued operations | 204.2 | ||
Total assets of discontinued operations | $ | 514.4 | |
Liabilities: | |||
Accounts payable | $ | 79.1 | |
Accrued payroll and related expenses | 18.3 | ||
Income taxes payable | 3.7 | ||
Accrued expenses | 17.5 | ||
Other current liabilities | 11.4 | ||
Current liabilities of discontinued operations | 130.0 | ||
Non-current liabilities of discontinued operations | 10.9 | ||
Total liabilities of discontinued operations | $ | 140.9 | |
In connection with the Separation, $7.8 million of accumulated other comprehensive loss, net of income taxes, related to foreign currency translation adjustments and the pension plan obligation was transferred to Lumentum on the Separation Date. Refer to “Note 5. Accumulated Other Comprehensive Income (Loss)” for more information.
The Company also transferred deferred tax assets of $29.5 million, deferred tax liabilities of $1.0 million, current income tax payables of $3.3 million, an income tax receivable of $1.3 million and other long-term liabilities related to uncertain tax positions totaling $0.1 million on the Separation date. The Company utilized approximately $1.0 billion of federal net operating losses to offset income recognized as a result of the Separation and the license of Lumentum’s intellectual property to a foreign subsidiary.
9
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The removal of Lumentum’s net assets and equity related adjustments upon the Separation are presented as an increase of Viavi's accumulated deficit and represents a non-cash financing activity, excluding the cash transferred. Refer to “Note 14. Stock-Based Compensation” for information on modifications to stock-based compensation awards as a result of the Distribution.
The following table summarizes results from discontinued operations of the Lumentum business included in the condensed Consolidated Statement of Operations (in millions):
Three Months Ended (1) | Nine Months Ended | ||||||||||
March 28, 2015 | April 2, 2016 | March 28, 2015 | |||||||||
Net revenues | $ | 198.3 | $ | 66.5 | $ | 627.3 | |||||
Cost of revenues | 139.1 | 49.8 | 426.5 | ||||||||
Amortization of acquired technologies | 1.9 | 0.6 | 5.7 | ||||||||
Gross profit | 57.3 | 16.1 | 195.1 | ||||||||
Operating expenses: | |||||||||||
Research and development | 34.6 | 12.5 | 104.4 | ||||||||
Selling, general and administrative | 21.3 | 24.7 | 57.3 | ||||||||
Restructuring charges | 0.5 | 0.1 | 2.9 | ||||||||
Total operating expenses | 56.4 | 37.3 | 164.6 | ||||||||
Income (loss) from operations | 0.9 | (21.2 | ) | 30.5 | |||||||
Interest and other income (expense), net | (0.5 | ) | — | (0.8 | ) | ||||||
Income (loss) before income taxes | 0.4 | (21.2 | ) | 29.7 | |||||||
(Benefit from) provision for income taxes | (22.2 | ) | 24.4 | (21.6 | ) | ||||||
Net income (loss) from discontinued operations | $ | 22.6 | $ | (45.6 | ) | $ | 51.3 | ||||
(1) Net income from discontinued operations for the three months ended April 2, 2016 of $5.0 million is comprised of costs to complete the separation offset by a benefit attributable to income taxes from discontinued operations of $6.1 million. No income or expense relating to the Lumentum business has been recorded after the separation from Viavi on August 1, 2015.
During the nine months ended April 2, 2016, the income tax provision for discontinued operations of $24.4 million, included approximately $7.6 million cash taxes that are due to federal and state authorities as a result of the Separation. In addition, approximately $17.1 million of the income tax provision for discontinued operations related to the income tax intraperiod tax allocation rules in relation to continuing operations and other comprehensive income.
Net (loss) income from discontinued operations also includes costs incurred by the Company to separate Lumentum such as transaction charges, advisory and consulting fees. Net income (loss) from discontinued operations for the three and nine months ended April 2, 2016 included $1.1 million and $16.5 million of costs to complete the separation, respectively. Net income (loss) from discontinued operations for the three and nine months ended March 28, 2015 included $5.2 million and $8.9 million of costs to complete the separation, respectively.
The following table presents supplemental cash flow information: depreciation expense, amortization expense, stock based compensation expense and capital expenditures of the Lumentum business (in millions):
Nine Months Ended | |||||||
April 2, 2016 | March 28, 2015 | ||||||
Operating activities: | |||||||
Depreciation expense | $ | 3.7 | $ | 32.3 | |||
Amortization expense | 0.6 | 6.0 | |||||
Stock-based compensation expense | 1.6 | 14.4 | |||||
Investing activities: | |||||||
Capital expenditures | $ | 5.8 | $ | 34.0 | |||
10
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 4. Earnings Per Share (Restated)
The following table sets forth the computation of basic and diluted net income (loss) per share (in millions, except per share data):
Three Months Ended | Nine Months Ended | ||||||||||||||
April 2, 2016 (Restated) | March 28, 2015 | April 2, 2016 (Restated) | March 28, 2015 | ||||||||||||
Numerator: | |||||||||||||||
Income (loss) from continuing operations, net of taxes | $ | 28.8 | $ | (35.8 | ) | $ | 14.1 | $ | (99.3 | ) | |||||
Income (loss) from discontinued operations, net of taxes | 5.0 | 22.6 | (45.4 | ) | 51.3 | ||||||||||
Net income (loss) | $ | 33.8 | $ | (13.2 | ) | $ | (31.3 | ) | $ | (48.0 | ) | ||||
Denominator: | |||||||||||||||
Weighted-average number of common shares outstanding | |||||||||||||||
Basic | 232.0 | 233.2 | 234.4 | 232.1 | |||||||||||
Effect of dilutive securities from stock-based benefit plans | 2.6 | — | 3.0 | — | |||||||||||
Diluted | 234.6 | 233.2 | 237.4 | 232.1 | |||||||||||
Net income (loss) per share - basic: | |||||||||||||||
Continuing operations | $ | 0.13 | $ | (0.16 | ) | $ | 0.06 | $ | (0.43 | ) | |||||
Discontinued operations | 0.02 | 0.10 | (0.19 | ) | 0.22 | ||||||||||
Net income (loss) per share | $ | 0.15 | $ | (0.06 | ) | $ | (0.13 | ) | $ | (0.21 | ) | ||||
Net income (loss) per share - diluted: | |||||||||||||||
Continuing operations | $ | 0.12 | $ | (0.16 | ) | $ | 0.06 | $ | (0.43 | ) | |||||
Discontinued operations | 0.02 | 0.10 | (0.19 | ) | 0.22 | ||||||||||
Net income (loss) per share | $ | 0.14 | $ | (0.06 | ) | $ | (0.13 | ) | $ | (0.21 | ) | ||||
The following table sets forth the weighted-average potentially dilutive securities excluded from the computation of the diluted net income (loss) per share because their effect would have been anti-dilutive (in millions):
Three Months Ended | Nine Months Ended | ||||||||||
April 2, 2016 (2) | March 28, 2015 (1)(2) | April 2, 2016 (2) | March 28, 2015 (1)(2) | ||||||||
Stock options and ESPP | 1.2 | 3.7 | 1.0 | 3.8 | |||||||
Restricted Stock Units | 3.0 | 10.4 | 2.3 | 10.6 | |||||||
Total potentially dilutive securities | 4.2 | 14.1 | 3.3 | 14.4 | |||||||
(1) As the Company incurred a net loss from continuing operations in the period, potential dilutive securities from employee stock options, employee stock purchase plan (“ESPP”) and Restricted Stock Units (“RSUs”) have been excluded from the diluted net loss per share computations as their effects were deemed anti-dilutive.
(2) The Company’s 0.625% Senior Convertible 2033 Notes are not included in the table above. The par amount of convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and then the “in-the-money” conversion benefit feature at the conversion price above $11.28 per share is payable in cash, shares of the Company’s common stock or a combination of both. Refer to “Note 10. Debts and Letters of Credit” for more details.
11
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 5. Accumulated Other Comprehensive Income (Loss)
The Company’s accumulated other comprehensive income (loss) consists of the accumulated net unrealized gains and losses on available-for-sale investments, foreign currency translation adjustments and defined benefit obligations.
For the nine months ended April 2, 2016 the changes in accumulated other comprehensive income (loss) by component net of tax were as follows (in millions):
Unrealized (losses) on available-for sale investments (2) | Foreign currency translation adjustments | Defined benefit obligation, net of tax (3) | Total | ||||||||||||
Beginning balance as of June 27, 2015 | $ | (3.2 | ) | $ | (29.2 | ) | $ | (15.6 | ) | $ | (48.0 | ) | |||
Transferred to Lumentum (1) | — | (8.9 | ) | 1.1 | (7.8 | ) | |||||||||
Other comprehensive (loss) income before reclassification | 201.6 | (18.4 | ) | — | 183.2 | ||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | (38.8 | ) | — | 0.5 | (38.3 | ) | |||||||||
Net current-period other comprehensive (loss) income | 162.8 | (18.4 | ) | 0.5 | 144.9 | ||||||||||
Ending balance as of April 2, 2016 | $ | 159.6 | $ | (56.5 | ) | $ | (14.0 | ) | $ | 89.1 | |||||
(1) Amount represents the transfer of accumulated other comprehensive balances to Lumentum as of the Separation Date. Refer to “Note 3. Discontinued Operations” for more information.
(2) Activity before reclassifications to the Consolidated Statements of Operations during the nine months ended April 2, 2016 primarily relates to a $205.3 million gross unrealized gain on the marketable equity securities of Lumentum held by Viavi, net of a $3.7 million income tax effect related to the intraperiod tax allocation rules. The amount reclassified out of accumulated other comprehensive income (loss) is primarily composed of a $39.7 million realized gain before tax during the three months ended April 2, 2016 from the sale of 2.5 million shares out of 11.7 million shares of the marketable equity securities of Lumentum held by Viavi upon Separation, net of a $1.0 million income tax effect related to the intraperiod tax allocation rules. The gain and the income tax effect are included in "Gain on sale of investments" and “Provision for income taxes,” respectively, in the Consolidated Statement of Operations for the three and nine months ended April 2, 2016.
(3) Amount represents the amortization of actuarial losses included as a component of Selling, general and administrative expense (“SG&A”) in the Consolidated Statement of Operations for the nine months ended April 2, 2016. There was no tax impact. Refer to “Note 15. Employee Pension and Other Benefit Plans” for more details on the computation of net periodic cost for pension plans.
Note 6. Balance Sheet and Other Details
Accounts receivable reserves and allowances
The components of accounts receivable reserves and allowances were as follows (in millions):
June 27, 2015 | Charged to Costs and Expenses | Adjustments (1) | April 2, 2016 | ||||||||||||
Allowance for doubtful accounts | $ | 2.4 | $ | 0.1 | $ | (0.4 | ) | $ | 2.1 | ||||||
Allowance for sales returns | 0.7 | 2.7 | (1.7 | ) | 1.7 | ||||||||||
Total accounts receivable reserves | $ | 3.1 | $ | 2.8 | $ | (2.1 | ) | $ | 3.8 | ||||||
(1) Represents the effect of currency translation adjustments and write-offs of uncollectible accounts, net of recoveries.
12
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Inventories, net
The components of Inventories, net were as follows (in millions):
April 2, 2016 | June 27, 2015 | ||||||
Finished goods | $ | 30.5 | $ | 31.5 | |||
Work in process | 6.8 | 6.8 | |||||
Raw materials | 15.2 | 15.5 | |||||
Inventories, net | $ | 52.5 | $ | 53.8 | |||
Prepayments and other current assets
The components of Prepayments and other current assets were as follows (in millions):
April 2, 2016 | June 27, 2015 | ||||||
Prepayments | $ | 12.5 | $ | 15.7 | |||
Other current assets | 22.2 | 22.5 | |||||
Prepayments and other current assets | $ | 34.7 | $ | 38.2 | |||
Other current liabilities
The components of Other current liabilities were as follows (in millions):
April 2, 2016 | June 27, 2015 | ||||||
Deferred compensation plan | $ | 2.4 | $ | 3.0 | |||
Warranty | 2.6 | 2.3 | |||||
Value-added tax | 2.8 | 1.7 | |||||
Restructuring | 7.0 | 19.1 | |||||
Deferred income taxes | — | 7.1 | |||||
Other | 2.9 | 10.3 | |||||
Other current liabilities | $ | 17.7 | $ | 43.5 | |||
Other non-current liabilities
The components of Other non-current liabilities were as follows (in millions):
April 2, 2016 | June 27, 2015 | ||||||
Pension and post-employment benefits | $ | 83.5 | $ | 86.9 | |||
Financing obligation | 29.0 | 29.1 | |||||
Restructuring accrual | 5.3 | 8.2 | |||||
Long-term deferred revenue | 24.2 | 23.6 | |||||
Other | 30.4 | 20.6 | |||||
Other non-current liabilities | $ | 172.4 | $ | 168.4 | |||
13
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 7. Investments and Fair Value Measurements
The Company’s investments in marketable debt and equity securities were primarily classified as available-for-sale securities. As of April 2, 2016, the Company’s available-for-sale securities were as follows (in millions):
Amortized Cost/ Carrying Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Debt securities: | |||||||||||||||
U.S. treasuries | $ | 60.2 | $ | — | $ | — | $ | 60.2 | |||||||
U.S. agencies | 29.1 | — | — | 29.1 | |||||||||||
Municipal bonds and sovereign debt instruments | 2.3 | — | — | 2.3 | |||||||||||
Asset-backed securities | 46.3 | 0.1 | (0.4 | ) | 46.0 | ||||||||||
Corporate securities | 206.8 | 0.1 | (0.1 | ) | 206.8 | ||||||||||
Total debt securities | 344.7 | 0.2 | (0.5 | ) | 344.4 | ||||||||||
Marketable equity securities | 78.8 | 165.5 | — | 244.3 | |||||||||||
Total available-for-sale securities | $ | 423.5 | $ | 165.7 | $ | (0.5 | ) | $ | 588.7 | ||||||
The Company generally classifies debt securities as cash equivalents, short-term investments or other non-current assets based on the stated maturities; however, certain securities with stated maturities of longer than twelve months which are highly liquid and available to support current operations are also classified as short-term investments. As of April 2, 2016, of the total fair value, $34.7 million was classified as cash equivalents, $309.1 million was classified as short-term investments and $0.6 million was classified as other non-current assets.
Marketable equity securities consist of the Company’s ownership of Lumentum common stock retained in connection with the Separation. Refer to “Note 3. Discontinued Operations” for more information. These securities are stated at fair value, with unrealized gains and losses reported in other comprehensive income, net of tax and are classified as short-term investments on the Consolidated Balance Sheet as of April 2, 2016 at $244.3 million. The Company sold 2.5 million shares during the third quarter of fiscal 2016 and recognized a realized gain before tax of $39.7 million, net of a $1.0 million income tax effect related to the intraperiod tax allocation rules, reflected in "Gain on sale of investments" in the Consolidated Statements of Operations.
In addition to the amounts presented above, as of April 2, 2016, the Company’s short-term investments classified as trading securities related to the deferred compensation plan were $2.4 million, of which $0.4 million was invested in debt securities, $0.7 million was invested in money market instruments and funds and $1.3 million was invested in equity securities. Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in Interest and other income (expense), net.
During the three and nine months ended April 2, 2016 and March 28, 2015, the Company recorded no other-than-temporary impairment charges in each respective period.
As of April 2, 2016, contractual maturities of the Company’s debt securities classified as available-for-sale securities were as follows (in millions):
Amortized Cost/ Carrying Cost | Estimated Fair Value | ||||||
Amounts maturing in less than 1 year | $ | 251.6 | $ | 251.6 | |||
Amounts maturing in 1 - 5 years | 91.4 | 91.4 | |||||
Amounts maturing in more than 5 years | 1.7 | 1.4 | |||||
Total debt available-for-sale securities | $ | 344.7 | $ | 344.4 | |||
14
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
As of June 27, 2015, the Company’s available-for-sale securities were as follows (in millions):
Amortized Cost/ Carrying Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Debt securities: | |||||||||||||||
U.S. treasuries | $ | 51.9 | $ | — | $ | — | $ | 51.9 | |||||||
U.S. agencies | 96.0 | — | — | 96.0 | |||||||||||
Municipal bonds and sovereign debt instruments | 4.0 | — | — | 4.0 | |||||||||||
Asset-backed securities | 70.6 | — | (0.2 | ) | 70.4 | ||||||||||
Corporate securities | 274.1 | 0.1 | (0.1 | ) | 274.1 | ||||||||||
Total debt available-for-sale securities | $ | 496.6 | $ | 0.1 | $ | (0.3 | ) | $ | 496.4 | ||||||
As of June 27, 2015, of the total fair value, $33.7 million was classified as cash equivalents, $461.9 million was classified as short-term investments and $0.8 million was classified as other non-current assets.
In addition to the amounts presented above, as of June 27, 2015, the Company’s short-term investments classified as trading securities, related to the deferred compensation plan, were $3.4 million, of which $0.6 million was invested in debt securities, $0.7 million was invested in money market instruments and funds and $2.1 million was invested in equity securities. Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in Interest and other income (expense), net.
Fair Value Measurements
Assets measured at fair value as of April 2, 2016 are summarized below (in millions):
Fair value measurement as of | |||||||||||
April 2, 2016 | |||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | |||||||||
Assets: | |||||||||||
Debt available-for-sale securities | |||||||||||
U.S. treasuries | $ | 60.2 | $ | 60.2 | $ | — | |||||
U.S. agencies | 29.1 | — | 29.1 | ||||||||
Municipal bonds and sovereign debt instruments | 2.3 | — | 2.3 | ||||||||
Asset-backed securities | 46.0 | — | 46.0 | ||||||||
Corporate securities | 206.8 | — | 206.8 | ||||||||
Total debt available-for-sale securities | 344.4 | 60.2 | 284.2 | ||||||||
Marketable equity securities | 244.3 | 244.3 | — | ||||||||
Money market funds | 273.7 | 273.7 | — | ||||||||
Trading securities | 2.4 | 2.4 | — | ||||||||
Total assets (1) | $ | 864.8 | $ | 580.6 | $ | 284.2 | |||||
(1) $293.5 million in cash and cash equivalents, $555.8 million in short-term investments, $11.1 million in restricted cash, and $4.4 million in other non-current assets on the Company’s Consolidated Balance Sheets.
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions about the factors that market participants would use in valuing the asset or liability.
15
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The Company’s cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy based on quoted prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.
• | Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets. Level 1 assets of the Company include money market funds, U.S. Treasury securities and marketable equity securities as they are traded with sufficient volume and frequency of transactions. |
• | Level 2 includes financial instruments for which the valuations are based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. Level 2 instruments of the Company generally include certain U.S. and foreign government and agency securities, commercial paper, corporate and municipal bonds and notes, asset-backed securities, and foreign currency forward contracts. To estimate their fair value, the Company utilizes pricing models based on market data. The significant inputs for the valuation model usually include benchmark yields, reported trades, broker and dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, and industry and economic events. |
• | Level 3 includes financial instruments for which fair value is derived from valuation based on inputs that are unobservable and significant to the overall fair value measurement. As of June 27, 2015 and during the three and nine months ended April 2, 2016 and March 28, 2015, the Company did not hold any Level 3 investment securities. |
Foreign Currency Forward Contracts
The Company has foreign subsidiaries that operate and sell the Company’s products in various markets around the world. As a result, the Company is exposed to foreign exchange risks. The Company utilizes foreign exchange forward contracts and other instruments to manage foreign currency risk associated with foreign currency denominated monetary assets and liabilities, primarily certain short-term intercompany receivables and payables, and to reduce the volatility of earnings and cash flows related to foreign-currency transactions.
The forward contracts, most with a term of less than 120 days, were transacted near quarter end; therefore, the fair value of the contracts as of both April 2, 2016 and June 27, 2015 is not material. The change in the fair value of these foreign currency forward contracts is recorded as gain or loss in the Company’s Consolidated Statements of Operations as a component of Interest and other income (expense), net.
Note 8. Goodwill
The following table presents the changes in goodwill allocated to the Company’s reportable segments (in millions):
Network Enablement | Service Enablement | Optical Security and Performance Products | Total | ||||||||||||
Balance as of June 27, 2015 | $ | 154.5 | $ | 92.7 | $ | 8.3 | $ | 255.5 | |||||||
Currency translation and other adjustments | (2.7 | ) | (1.5 | ) | — | (4.2 | ) | ||||||||
Goodwill allocation - WaveReady (1) | (6.0 | ) | — | — | (6.0 | ) | |||||||||
Balance as of April 2, 2016 | $ | 145.8 | $ | 91.2 | $ | 8.3 | $ | 245.3 | |||||||
(1) Amount represents a release of the relative fair value of goodwill in our NE reporting unit related to the WaveReady products line, which is now a part of Lumentum as of the Separation Date. Refer to “Note 3. Discontinued Operations” for more information.
The Company reviews goodwill for impairment during the fourth quarter of each fiscal year, or more frequently if events or circumstances indicate that an impairment loss may have occurred. In the fourth quarter of fiscal 2015, the Company completed the annual impairment test of goodwill with no goodwill impairments. There were no events or changes in circumstances which triggered an impairment review during the three and nine months ended months ended April 2, 2016.
16
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 9. Acquired Developed Technology and Other Intangibles
The following tables present details of the Company’s acquired developed technology, customer relationships and other intangibles (in millions):
As of April 2, 2016 | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||
Acquired developed technology | $ | 421.9 | $ | (385.1 | ) | $ | 36.8 | ||||
Customer relationships | 175.4 | (144.0 | ) | 31.4 | |||||||
Other | 19.3 | (18.9 | ) | 0.4 | |||||||
Total intangibles subject to amortization | 616.6 | (548.0 | ) | 68.6 | |||||||
In-process research and development assets | 0.8 | — | 0.8 | ||||||||
Total intangibles | $ | 617.4 | $ | (548.0 | ) | $ | 69.4 | ||||
As of June 27, 2015 | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||
Acquired developed technology | $ | 418.9 | $ | (373.6 | ) | $ | 45.3 | ||||
Customer relationships | 178.7 | (135.8 | ) | 42.9 | |||||||
Other | 19.5 | (18.9 | ) | 0.6 | |||||||
Total intangibles subject to amortization | 617.1 | (528.3 | ) | 88.8 | |||||||
In-process research and development assets | 1.8 | — | 1.8 | ||||||||
Total intangibles | $ | 618.9 | $ | (528.3 | ) | $ | 90.6 | ||||
During the first quarter of fiscal 2016, the Company completed its in-process research and development (“IPR&D”) project related to the fiscal 2014 acquisition of Trendium. Accordingly, $1.8 million was transferred from indefinite life intangible assets to acquired developed technology intangible assets with a useful life of thirty-six months.
The following table presents the amortization recorded relating to acquired developed technology, customer relationships and other intangibles (in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||
April 2, 2016 | March 28, 2015 | April 2, 2016 | March 28, 2015 | ||||||||||||
Amortization of acquired developed technologies | $ | 4.1 | $ | 9.0 | $ | 13.0 | $ | 26.3 | |||||||
Amortization of other intangibles | 3.6 | 4.8 | 11.1 | 14.7 | |||||||||||
Total amortization of intangible assets | $ | 7.7 | $ | 13.8 | $ | 24.1 | $ | 41.0 | |||||||
Based on the carrying amount of acquired developed technology, customer relationships and other intangibles as of April 2, 2016, and assuming no future impairment of the underlying assets, the estimated future amortization is as follows (in millions):
Fiscal Years | |||
Remainder of 2016 | $ | 7.6 | |
2017 | 29.2 | ||
2018 | 20.8 | ||
2019 | 9.3 | ||
2020 | 1.3 | ||
Thereafter | 0.4 | ||
Total amortization | $ | 68.6 | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The acquired developed technology, customer relationships and other intangibles balance are adjusted quarterly to record the effect of currency translation adjustments.
Note 10. Debts and Letters of Credit
As of April 2, 2016 and June 27, 2015, the Company’s long-term debt on the Consolidated Balance Sheets represented the carrying amount of the liability component of the 0.625% Senior Convertible Notes as discussed below. The following table presents the carrying amounts of the liability and equity components (in millions):
April 2, 2016 | June 27, 2015 | ||||||
Principal amount of 0.625% Senior Convertible Notes | $ | 650.0 | $ | 650.0 | |||
Unamortized discount of liability component | (68.5 | ) | (88.4 | ) | |||
Carrying amount of liability component | $ | 581.5 | $ | 561.6 | |||
Carrying amount of equity component (1) | $ | 134.4 | $ | 134.4 | |||
(1) | Included in Accumulated paid-in-capital on the Consolidated Balance Sheets. |
The Company was in compliance with all debt covenants and held no short term debt as of April 2, 2016 and June 27, 2015.
0.625% Senior Convertible Notes (“2033 Notes”)
On August 21, 2013, the Company issued $650.0 million aggregate principal amount of 0.625% Senior Convertible Notes due 2033 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The proceeds from the 2033 Notes amounted to $636.3 million after issuance costs. The 2033 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 0.625% payable in cash semi-annually in arrears on February 15 and August 15 of each year. The 2033 Notes mature on August 15, 2033 unless earlier converted, redeemed or repurchased. The 2033 Notes and its terms are described in “Note 10. Debts and Letters of Credit” of the Company’s Annual Report on Form 10-K for the year ended June 27, 2015.
Following the separation of the Lumentum business on August 1, 2015, the conversion price per share was adjusted pursuant to the terms of the 2033 Notes relating to the occurrence of the Separation. Effective as of the end of the business day on August 17, 2015, the initial conversion price per share was adjusted to $11.28 per share of the Company’s common stock traded on NASDAQ under the ticker symbol “VIAV.”
In accordance with the authoritative accounting guidance, the Company separated the 2033 Notes into liability and equity components. The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 5.4% based on the 5-year swap rate plus credit spread as of the issuance date. The credit spread for the Company is based on the historical average “yield to worst” rate for BB rated issuers. The difference between the 2033 Notes principal and the carrying value of the liability component, representing the value of conversion premium assigned to the equity component, was recorded as a debt discount on the issuance date and is being accreted using the effective interest rate of 5.4% over the period from the issuance date through August 15, 2018 as a non-cash charge to interest expense. The carrying value of the liability component was determined to be $515.6 million, and the equity component, or debt discount, of the 2033 Notes was determined to be $134.4 million. As of April 2, 2016, the expected remaining term of the 2033 Notes is 2.4 years.
In connection with the issuance of the 2033 Notes, the Company incurred $13.7 million of issuance costs, which were bifurcated into the debt issuance costs, attributable to the liability component of $10.9 million and the equity issuance costs, attributable to the equity component of $2.8 million based on their relative values. The debt issuance costs were capitalized and are being amortized to interest expense using the effective interest rate method from issuance date through August 15, 2018. The equity issuance costs were netted against the equity component in additional paid-in capital at the issuance date. As of April 2, 2016, the unamortized portion of the debt issuance costs related to the 2033 Notes was $5.6 million, which was included in Other non-current assets on the Consolidated Balance Sheets.
Based on quoted market prices as of April 2, 2016 and June 27, 2015, the fair value of the 2033 Notes was approximately $636.9 million and $644.0 million. The 2033 Notes are classified within Level 2 as they are not actively traded in markets.
18
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The following table presents the effective interest rate and the interest expense for the contractual interest and the accretion of debt discount (in millions, except for the effective interest rate):
Three Months Ended | Nine Months Ended | ||||||||||||||
April 2, 2016 | March 28, 2015 | April 2, 2016 | March 28, 2015 | ||||||||||||
Effective interest rate | 5.4 | % | 5.4 | % | 5.4 | % | 5.4 | % | |||||||
Interest expense-contractual interest | $ | 1.0 | $ | 1.0 | $ | 3.0 | $ | 3.0 | |||||||
Accretion of debt discount | 6.7 | 6.3 | 19.9 | 18.8 | |||||||||||
Outstanding Letters of Credit
As of April 2, 2016, the Company had 12 standby letters of credit totaling $14.9 million.
Note 11. Restructuring and Related Charges
The Company has initiated various strategic restructuring events primarily intended to reduce its costs, consolidate its operations, rationalize the manufacturing of its products and align its businesses in response to market conditions. As of April 2, 2016 and June 27, 2015, the Company’s total restructuring accrual was $12.3 million and $27.2 million. During the three and nine months ended April 2, 2016 the Company recorded restructuring and related (benefits) charges of $(0.1) million and $1.7 million, respectively. During the three and nine months ended March 28, 2015 the Company recorded restructuring and related charges of $7.8 million and $18.0 million, respectively. The Company’s restructuring charges can include severance and benefit costs to eliminate a specified number of positions, facilities and equipment costs to vacate facilities and consolidate operations, and lease termination costs. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over multiple periods.
Summary of Restructuring Plans
The adjustments to the accrued restructuring expenses related to all of the Company’s restructuring plans described below for the three and nine months ended April 2, 2016 were as follows (in millions):
Balance June 27, 2015 | Nine Months Ended April 2, 2016 Charges | Cash Settlements | Non-cash Settlements and Other Adjustments | Balance April 2, 2016 | Three Months Ended April 2, 2016 Charges | |||||||||||||||||||
Fiscal 2016 Plan | ||||||||||||||||||||||||
NE and SE Agile Restructuring Plan (Workforce Reduction) | $ | — | $ | 3.0 | $ | (1.1 | ) | $ | — | $ | 1.9 | $ | — | |||||||||||
Fiscal 2015 Plan | ||||||||||||||||||||||||
NE, SE and Shared Service Separation Restructuring Plan (Workforce Reduction) | 14.9 | (0.6 | ) | (11.7 | ) | (0.2 | ) | 2.4 | (0.1 | ) | ||||||||||||||
Fiscal 2014 Plans | ||||||||||||||||||||||||
NE Realignment Plan (Workforce Reduction) | 0.6 | (0.1 | ) | (0.5 | ) | — | — | — | ||||||||||||||||
Shared Services Restructuring Plan (Workforce Reduction) | 0.7 | — | (0.7 | ) | — | — | — | |||||||||||||||||
NE Product Strategy Restructuring Plan (Workforce Reduction) | 2.3 | — | (0.5 | ) | — | — | 1.8 | — | ||||||||||||||||
NE Lease Restructuring Plan | 5.2 | 0.2 | (1.0 | ) | — | 4.4 | — | |||||||||||||||||
Central Finance and IT Restructuring Plan (Workforce Reduction) | 1.1 | (0.7 | ) | (0.1 | ) | — | 0.3 | — | ||||||||||||||||
Plans Prior to Fiscal 2014 | 2.4 | (0.1 | ) | (0.8 | ) | — | 1.5 | — | ||||||||||||||||
Total | $ | 27.2 | $ | 1.7 | $ | (16.4 | ) | $ | (0.2 | ) | $ | 12.3 | $ | (0.1 | ) | |||||||||
As of April 2, 2016 and June 27, 2015, $5.3 million and $8.2 million, respectively, of our restructuring liability was long-term in nature and included as a component of Other non-current liabilities, with the remaining short-term portion included as a component of Other current liabilities on the Consolidated Balance Sheets.
19
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Fiscal 2016 Plans
NE and SE Agile Restructuring Plan
During the second quarter of fiscal 2016, Management approved a plan primarily impacting the NE and SE business segments as part of Viavi’s ongoing commitment for an agile and more efficient operating structure. As a result, a restructuring charge of $3.0 million was recorded for severance and employee benefits for approximately 50 employees primarily in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the third quarter of fiscal 2017.
Fiscal 2015 Plans
NE, SE and Shared Service Separation Restructuring Plan
During the second, third and fourth quarters of fiscal 2015, Management approved a plan to eliminate certain positions in its shared services functions in connection with the Company’s plan to split into two separate public companies. Further, Management consolidated its operations, sales and R&D organizations and eliminated positions within the NE and SE segments to align to the Company’s product market strategy and lower manufacturing costs in connection with the separation. As a result, approximately 330 employees in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia were impacted. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the third quarter of fiscal 2018.
Fiscal 2014 Plans
NE Realignment Plan
During the fourth quarter of fiscal 2014, Management approved a NE plan to realign its operations and strategy to allow for greater investment in high-growth areas. As a result, approximately 100 employees in manufacturing, R&D and SG&A functions located in North America, Asia and Europe were impacted. Payments related to the remaining severance and benefits accrual were paid by the end of the second quarter of fiscal 2016.
Shared Services Restructuring Plan
During the fourth quarter of fiscal 2014, Management approved a plan to eliminate positions and re-define roles and responsibilities in its shared services functions in order to reduce cost, standardize global processes and establish a more efficient organization. As a result, approximately 40 employees primarily in the general and administrative functions located in the United States, Asia and Europe were impacted. Payments related to the remaining severance and benefits accrual were paid by the end of the fourth quarter of fiscal 2016.
NE Product Strategy Restructuring Plan
During the third quarter of fiscal 2014, Management approved a NE plan to realign its services, support and product resources in response to market conditions in the mobile assurance market and to increase focus on software products and next generation solutions through acquisitions and R&D. As a result, approximately 60 employees primarily in SG&A and manufacturing functions located in North America, Latin America, Asia and Europe were impacted. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the first quarter of fiscal 2020.
NE Lease Restructuring Plan
During the second quarter of fiscal 2014, Management approved a NE plan to exit the remaining space in Germantown, Maryland. As of June 28, 2014, the Company exited the space in Germantown under the plan. The fair value of the remaining contractual obligations, net of sublease income, as of April 2, 2016 was $4.4 million. Payments related to the Germantown lease costs are expected to be paid by the end of the second quarter of fiscal 2019.
Central Finance and Information Technology (“IT”) Restructuring Plan
During the second quarter of fiscal 2014, Management approved a plan to eliminate positions and re-define roles and responsibilities in the Finance and IT organization to align with the future state of the organizations under new executive management and move positions to lower-cost locations where appropriate. As a result, approximately 20 employees primarily in SG&A functions
20
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
located in North America, Asia and Europe were impacted. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the fourth quarter of fiscal 2019.
Plans Prior to Fiscal 2014
As of April 2, 2016, the restructuring accrual for plans that commenced prior to fiscal year 2014 was $1.5 million, which consists of immaterial accruals from various restructuring plans.
Note 12. Income Taxes (Restated)
The Company recorded an income tax expense of $9.9 million and $13.9 million related to the income from continuing operations for the three and nine months ended April 2, 2016, respectively. The Company recorded an income tax expense of $4.8 million and $19.1 million related to the loss from continuing operations for the three and nine months ended March 28, 2015, respectively. Refer to “Note 18. Restatement of Previously Issued Financial Statements” for more details and required disclosures.
The income tax expense related to the income (loss) from continuing operations recorded for the three and nine months ended April 2, 2016 and March 28, 2015 primarily relates to income tax in certain foreign and state jurisdictions based on the Company’s forecasted pre-tax income or loss for the respective year. In addition, for the three and nine months ended April 2, 2016 the Company’s income tax provision includes a tax expense of $7.6 million and a tax benefit of $14.6 million, respectively, related to the income tax intraperiod tax allocation rules for discontinued operations and other comprehensive income. The income tax expense related to the income from continuing operations for the nine months ended April 2, 2016 also includes a tax expense of $8.9 million related to a one-time increase in valuation allowance associated with deferred tax assets transferred to Lumentum in connection with the Separation.
The income tax expense related to the income (loss) from continuing operations recorded differs from the expected tax expense (benefit) that would be calculated by applying the federal statutory rate to the Company’s income (loss) from continuing operations before taxes primarily due to the increases in valuation allowance for deferred tax assets attributable to the Company’s domestic and foreign losses from continuing operations, the income tax benefit recorded in continuing operations under the income tax intraperiod tax allocation rules, and the increase in valuation allowance associated with deferred tax assets transferred to Lumentum in connection with the separation.
At the beginning of the second quarter of fiscal 2016, the Company prospectively adopted the authoritative guidance on balance sheet classification of deferred taxes, which requires deferred tax assets and liabilities, and any related valuation allowance, to be classified as non-current on the balance sheet.
As of April 2, 2016 and June 27, 2015, the Company’s unrecognized tax benefits totaled $37.0 million and $37.4 million, respectively, and are included in deferred taxes and other non-current tax liabilities, net. The Company had $1.7 million accrued for the payment of interest and penalties at April 2, 2016. The unrecognized tax benefits that may be recognized during the next twelve months are approximately $0.1 million.
Note 13. Stockholders' Equity
Repurchase of Common Stock
In May 2014, the Company's Board of Directors authorized a stock repurchase program under which the Company may purchase shares of its common stock worth up to an aggregate purchase price of $100.0 million through open market or private transactions. In October 2015, the Board extended the previously authorized repurchase program to utilize the remaining unused dollar amount from the program of approximately $40 million.
In November 2015, the Company entered into a $40.0 million accelerated share repurchase agreement (the “ASR”) with a financial institution that was completed during the third quarter of fiscal 2016. Upon making the upfront payment of $40.0 million, the Company received an initial delivery of 5.3 million shares from the financial institution during the second quarter of fiscal 2016, which were retired and recorded as a $32.0 million reduction to stockholder’s equity on the Consolidated Balance Sheet. During the third quarter of fiscal 2016 the ASR was completed and an additional 1.3 million shares were delivered from the financial institution, based on the final settlement price of $6.05 per share, which were retired and recorded as an $8.0 million reduction to stockholder’s equity on the Consolidated Balance Sheet. The Company reflects the repurchase of common stock under the ASR in the period the shares are delivered for the purposes of calculating earnings per share. All common shares repurchased under this program have been canceled and retired.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 14. Stock-Based Compensation
Overview
The impact on the Company’s results of operations of recording stock-based compensation by function for the three and nine months ended April 2, 2016 and March 28, 2015 was as follows (in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||
April 2, 2016 | March 28, 2015 | April 2, 2016 | March 28, 2015 | ||||||||||||
Cost of sales | $ | 1.1 | $ | 1.1 | $ | 3.7 | $ | 3.1 | |||||||
Research and development | 2.0 | 2.0 | 6.7 | 5.9 | |||||||||||
Selling, general and administrative | 6.0 | 11.7 | 23.6 | 26.8 | |||||||||||
Stock-based compensation | $ | 9.1 | $ | 14.8 | $ | 34.0 | $ | 35.8 | |||||||
Approximately $0.9 million of stock-based compensation was capitalized to inventory at April 2, 2016.
Full Value Awards
Full Value Awards refer to RSUs and Performance Units that are granted with the exercise price equal to zero and are converted to shares immediately upon vesting. These Full Value Awards are performance-based, time-based or a combination of both and expected to vest over one to four years. The fair value of the time-based Full Value Awards is based on the closing market price of the Company’s common stock on the date of award.
During the nine months ended April 2, 2016 and March 28, 2015, the Company granted 6.1 million and 5.6 million RSUs, of which 0.6 million and 0.7 million, respectively, are performance-based RSUs with market conditions (“MSUs”). These MSU shares represent the target amount of grants, and the actual number of shares awarded upon vesting of the MSUs may be higher or lower depending upon the achievement of the relevant market conditions. The majority of MSUs vest in equal annual installments over three years based on the attainment of certain total shareholder return performance measures and the employee’s continued service through the vest date. The aggregate grant-date fair value of MSUs granted through the third quarter of fiscal 2016 and fiscal 2015 was estimated to be $3.7 million and $9.4 million, respectively, and was calculated using a Monte Carlo simulation. The remaining 5.5 million and 4.9 million granted during the nine months ended April 2, 2016 and March 28, 2015, respectively, are time-based RSUs. The majority of these time-based RSUs vest over three years, with 33% vesting after one year and the balance vesting quarterly over the remaining two years. The grant amounts and grant-date fair values during the nine months ended March 28, 2015 represent the Company’s historical grant information and have not been adjusted to remove grants made to employees who transferred to Lumentum as part of the Separation.
As of April 2, 2016, $46.5 million of unrecognized stock-based compensation cost related to Full Value Awards remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 2.1 years.
Full Value Awards are converted into shares upon vesting. Shares equivalent in value to the minimum withholding taxes liability on the vested shares are withheld by the Company for the payment of such taxes. During the nine months ended April 2, 2016 and March 28, 2015, the Company paid $9.8 million and $17.2 million, respectively, and classified the payments as operating cash outflows in the Consolidated Statement of Cash Flows.
Impact on Stock-based Compensation Due to Separation
In connection with the separation of the Lumentum business on August 1, 2015 and in accordance with the Employee Matters Agreement, the Company made certain adjustments to the exercise price and number of shares underlying stock-based compensation awards with the intention of preserving the economic value of the awards for Viavi employees. These adjustments resulted in a modification of equity awards with total incremental stock-based compensation of $13.6 million, of which $9.2 million was expensed during the nine months ended April 2, 2016. The remaining $4.4 million will be amortized over the remaining requisite service period from Separation Date to the end of the vesting term.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Valuation Assumptions
The Company estimates the fair value of the new MSUs granted using a Monte Carlo simulation based on the assumptions described below for the following periods:
Nine Months Ended | |||||
April 2, 2016 | March 28, 2015 | ||||
Volatility of common stock | 33.6 | % | 40.8 | % | |
Average volatility of peer companies | 52.8 | % | 53.4 | % | |
Average correlation coefficient of peer companies | 0.1047 | 0.2156 | |||
Risk-free interest rate | 0.8 | % | 0.6 | % | |
Note 15. Employee Pension and Other Benefit Plans
In connection with the separation of Lumentum on August 1, 2015, the Company transferred the liabilities and assets of the Switzerland defined benefit pension plans to Lumentum in the amount of $6.7 million and $4.6 million, respectively.
The Company sponsors significant qualified and non-qualified pension plans for certain past and present employees in the United Kingdom (“U.K.”) and Germany. The Company also is responsible for the non-pension post-retirement benefit obligation assumed from a past acquisition. Most of the plans have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with acquisitions during fiscal 2010. Benefits are generally based upon years of service and compensation or stated amounts for each year of service.
As of April 2, 2016 the U.K. plan was partially funded while the other plans were unfunded. The Company’s policy for funded plans is to make contributions equal to or greater than the requirements prescribed by law or regulation. For unfunded plans, the Company pays the post-retirement benefits when due. During the nine months ended April 2, 2016, the Company contributed $0.7 million to the U.K. plan. The funded plans assets consist primarily of managed investments.
The following table presents the components of the net periodic cost for the pension and benefits plans (in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||
Pension Benefits | April 2, 2016 | March 28, 2015 | April 2, 2016 | March 28, 2015 | |||||||||||
Service cost | $ | 0.1 | $ | 0.1 | $ | 0.3 | $ | 0.2 | |||||||
Interest cost | 0.7 | 0.8 | 2.2 | 2.8 | |||||||||||
Expected return on plan assets | (0.4 | ) | (0.4 | ) | (1.2 | ) | (1.2 | ) | |||||||
Recognized net actuarial losses | 0.2 | 0.1 | 0.5 | 0.3 | |||||||||||
Net periodic benefit cost | $ | 0.6 | $ | 0.6 | $ | 1.8 | $ | 2.1 | |||||||
Both the calculation of the projected benefit obligation and net periodic cost are based upon actuarial valuations. These valuations use participant-specific information such as salary, age, years of service, and assumptions about interest rates, pension increases and other factors. At a minimum, the Company evaluates these assumptions annually and makes changes as necessary.
The Company expects to incur cash outlays of approximately $6.0 million related to its defined benefit pension plans during fiscal 2016 to make current benefit payments and fund future obligations. As of April 2, 2016, approximately $3.9 million had been incurred. These payments have been estimated based on the same assumptions used to measure the Company’s projected benefit obligation at June 27, 2015.
Note 16. Commitments and Contingencies
Legal Proceedings
The Company is subject to a variety of claims and suits that arise from time to time in the ordinary course of our business. While management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on its financial position, results of operations or statement of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an unfavorable final outcome to
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
occur, there exists the possibility of a material adverse impact on the Company’s financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable.
Guarantees
In accordance with authoritative guidance which requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities, are required.
The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on the consolidated balance sheet as of April 2, 2016 and June 27, 2015.
Product Warranties
In general, the Company offers a three-year warranty for most of its products. The Company provides reserves for the estimated costs of product warranties at the time revenue is recognized. The Company estimates the costs of its warranty obligations based on its historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise with specific products. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
The following table presents the changes in the Company’s warranty reserve during fiscal 2016 and fiscal 2015 (in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||
April 2, 2016 | March 28, 2015 | April 2, 2016 | March 28, 2015 | ||||||||||||
Balance as of beginning of period | $ | 4.3 | $ | 3.5 | $ | 3.7 | $ | 3.6 | |||||||
Provision for warranty | 0.8 | 1.0 | 2.5 | 2.9 | |||||||||||
Utilization of reserve | (0.8 | ) | (0.9 | ) | (2.3 | ) | (3.0 | ) | |||||||
Adjustments related to pre-existing warranties (including changes in estimates) | 0.2 | — | 0.6 | 0.1 | |||||||||||
Balance as of end of period | $ | 4.5 | $ | 3.6 | $ | 4.5 | $ | 3.6 | |||||||
Note 17. Operating Segments
The Company evaluates its reportable segments in accordance with the authoritative guidance on segment reporting. The Company’s Chief Executive Officer, Oleg Khaykin, is the Company’s Chief Operating Decision Maker (“CODM”) pursuant to the guidance. The CODM allocates resources to the segments based on their business prospects, competitive factors, net revenue and operating results.
The Company provides software and hardware platforms and instruments that deliver end-to-end visibility across physical, virtual and hybrid networks. Viavi’s solutions provide intelligence and insight across the network ecosystem to optimize networks and support more profitable, higher-performing networks for our customers. Viavi is also a leader in anti-counterfeiting solutions for currency authentication and high-value optical components and instruments for diverse government and commercial applications.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The Company’s reportable segments are:
(i) Network Enablement (“NE”):
NE provides testing solutions that access the network to perform build out and maintenance tasks. These solutions include instruments and software to design, build, turn-up, certify, troubleshoot, and optimize networks.
(ii) Service Enablement (“SE”):
SE solutions are embedded systems that yield network, service and application performance data. These solutions—including microprobes and software—monitor, collect and analyze network data to reveal the actual customer experience and to identify opportunities for new revenue streams and network optimization.
(iii) Optical Security and Performance Products (“OSP”):
OSP provides innovative optical security solutions, with a strategic focus on serving the anti-counterfeiting market through advanced security pigments, thread substrates and printed features for the currency, pharmaceutical and consumer electronic segments. OSP also provides thin-film coating solutions for 3D sensing applications.
Changes to Segment Reporting
Following the Separation in the first quarter of fiscal 2016, the Company made changes to its segment measures to reflect how the CODM manages the business post-separation as described below.
The CODM manages the Company in two broad business categories: Network and Service Enablement ("NSE") and OSP. NSE operates in two segments, NE and SE, whereas OSP operates as a single segment. The CODM evaluates segment performance of the NSE business based on NE and SE segment gross margin and NSE operating margin as a whole. Operating expenses associated with the NSE business are not allocated to the NE and SE segments within NSE, as they are managed centrally at the business unit level. The CODM evaluates segment performance of the OSP business based on OSP segment operating margin. In addition, prior to the first quarter of fiscal 2016 the Company did not allocate certain corporate-level operating expenses associated with its shared-service function to its segment results. Beginning in the first quarter of fiscal 2016, the Company has allocated these corporate-level operating expenses to its segment results, with the exception of certain non-recurring activities and other items as discussed below.
The Company does not allocate stock-based compensation, acquisition-related charges and amortization of intangibles, restructuring and related charges, non-operating income and expenses, or other non-recurring charges to our segments because Management does not include this information in its measurement of the performance of the operating segments. These items are presented as “Reconciling Items” in the table below.
As a result of the Separation, the Company excluded the results of the Lumentum business which historically consisted of the CCOP segment and the WaveReady product line within the NE segment for all periods presented. Refer to “Note 3. Discontinued Operations” for more information on the Separation. Additionally, the Company’s Video Assurance product line was moved out of its NE segment and into its SE segment during the first quarter of fiscal 2016.
The segment information for all periods presented has been revised to be comparable with the changes in the Company’s segment reporting measures.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Information on reportable segments is as follows (in millions):
Three Months Ended April 2, 2016 | |||||||||||||||||||||||||||
Network and Service Enablement | |||||||||||||||||||||||||||
Network Enablement | Service Enablement | Network and Service Enablement | Optical Security and Performance Products | Total Segment Measures | Corporate Reconciling Items | Consolidated GAAP Measures | |||||||||||||||||||||
Net revenue | $ | 123.1 | $ | 35.2 | $ | 158.3 | $ | 62.1 | $ | 220.4 | $ | — | $ | 220.4 | |||||||||||||
Gross profit | 80.7 | 19.8 | 100.5 | 35.9 | 136.4 | (5.1 | ) | 131.3 | |||||||||||||||||||
Gross margin | 65.6 | % | 56.3 | % | 63.5 | % | 57.8 | % | 61.9 | % | 59.6 | % | |||||||||||||||
Operating (loss) income | (0.1 | ) | 26.3 | 26.2 | (19.0 | ) | 7.2 | ||||||||||||||||||||
Operating margin | (0.1 | )% | 42.4 | % | 11.9 | % | 3.3 | % | |||||||||||||||||||
Three Months Ended March 28, 2015 | |||||||||||||||||||||||||||
Network and Service Enablement | |||||||||||||||||||||||||||
Network Enablement | Service Enablement | Network and Service Enablement | Optical Security and Performance Products | Total Segment Measures | Corporate Reconciling Items | Consolidated GAAP Measures | |||||||||||||||||||||
Net revenue | $ | 124.1 | $ | 39.9 | $ | 164.0 | $ | 48.4 | $ | 212.4 | $ | — | $ | 212.4 | |||||||||||||
Gross profit | 83.2 | 28.2 | 111.4 | 26.3 | 137.7 | (10.7 | ) | 127.0 | |||||||||||||||||||
Gross margin | 67.0 | % | 70.7 | % | 67.9 | % | 54.3 | % | 64.8 | % | 59.8 | % | |||||||||||||||
Operating income (loss) | 1.7 | 17.3 | 19.0 | (42.2 | ) | (23.2 | ) | ||||||||||||||||||||
Operating margin | 1.0 | % | 35.7 | % | 8.9 | % | (10.9 | )% | |||||||||||||||||||
Three Months Ended | |||||||
April 2, 2016 | March 28, 2015 | ||||||
Corporate reconciling items impacting gross profit: | |||||||
Total segment gross profit | $ | 136.4 | $ | 137.7 | |||
Stock-based compensation | (1.1 | ) | (1.1 | ) | |||
Amortization of intangibles | (4.1 | ) | (9.0 | ) | |||
Other charges related to non-recurring activities | 0.1 | (0.6 | ) | ||||
GAAP gross profit | $ | 131.3 | $ | 127.0 | |||
Corporate reconciling items impacting operating income (loss): | |||||||
Total segment operating income | $ | 26.2 | $ | 19.0 | |||
Stock-based compensation | (9.1 | ) | (14.8 | ) | |||
Amortization of intangibles | (7.7 | ) | (13.8 | ) | |||
Other charges related to non-recurring activities (1) | (2.3 | ) | (5.8 | ) | |||
Restructuring and related charges | 0.1 | (7.8 | ) | ||||
GAAP operating income (loss) from continuing operations | $ | 7.2 | $ | (23.2 | ) | ||
(1) During the three months ended April 2, 2016 and March 28, 2015, other charges related to non-recurring activities primarily consisted of Viavi-specific incremental charges for professional fees and additional personnel costs to complete the separation as well as transformational initiatives such as the implementation of simplified automated processes, site consolidations, reorganizations, and the insourcing or outsourcing of activities.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Nine Months Ended April 2, 2016 | |||||||||||||||||||||||||||
Network and Service Enablement | |||||||||||||||||||||||||||
Network Enablement | Service Enablement | Network and Service Enablement | Optical Security and Performance Products | Total Segment Measures | Corporate Reconciling Items | Consolidated GAAP Measures | |||||||||||||||||||||
Net revenue | $ | 377.1 | $ | 120.0 | $ | 497.1 | $ | 185.1 | $ | 682.2 | $ | — | $ | 682.2 | |||||||||||||
Gross profit | 247.0 | 77.7 | 324.7 | 105.7 | 430.4 | (16.8 | ) | 413.6 | |||||||||||||||||||
Gross margin | 65.5 | % | 64.8 | % | 65.3 | % | 57.1 | % | 63.1 | % | 60.6 | % | |||||||||||||||
Operating (loss) income | 10.3 | 75.1 | 85.4 | (71.9 | ) | 13.5 | |||||||||||||||||||||
Operating margin | 2.1 | % | 40.6 | % | 12.5 | % | 2.0 | % | |||||||||||||||||||
Nine Months Ended March 28, 2015 | |||||||||||||||||||||||||||
Network and Service Enablement | |||||||||||||||||||||||||||
Network Enablement | Service Enablement | Network and Service Enablement | Optical Security and Performance Products | Total Segment Measures | Corporate Reconciling Items | Consolidated GAAP Measures | |||||||||||||||||||||
Net revenue | $ | 374.6 | $ | 137.2 | $ | 511.8 | $ | 142.3 | $ | 654.1 | $ | — | $ | 654.1 | |||||||||||||
Gross profit | 248.0 | 95.6 | 343.6 | 76.1 | 419.7 | (30.7 | ) | 389.0 | |||||||||||||||||||
Gross margin | 66.2 | % | 69.7 | % | 67.1 | % | 53.5 | % | 64.2 | % | 59.5 | % | |||||||||||||||
Operating income (loss) | 2.4 | 48.7 | 51.1 | (107.9 | ) | (56.8 | ) | ||||||||||||||||||||
Operating margin | 0.5 | % | 34.2 | % | 7.8 | % | (8.7 | )% | |||||||||||||||||||
Nine Months Ended | |||||||
April 2, 2016 | March 28, 2015 | ||||||
Corporate reconciling items impacting gross profit: | |||||||
Total segment gross profit | $ | 430.4 | $ | 419.7 | |||
Stock-based compensation | (3.7 | ) | (3.1 | ) | |||
Amortization of intangibles | (13.0 | ) | (26.3 | ) | |||
Other charges related to non-recurring activities | (0.1 | ) | (1.3 | ) | |||
GAAP gross profit | $ | 413.6 | $ | 389.0 | |||
Corporate reconciling items impacting operating income (loss): | |||||||
Total segment operating income | $ | 85.4 | $ | 51.1 | |||
Stock-based compensation | (34.0 | ) | (35.8 | ) | |||
Amortization of intangibles | (24.1 | ) | (41.0 | ) | |||
Other charges related to non-recurring activities (1) | (12.1 | ) | (13.1 | ) | |||
Restructuring and related charges | (1.7 | ) | (18.0 | ) | |||
GAAP operating income (loss) from continuing operations | $ | 13.5 | $ | (56.8 | ) | ||
(1) During the nine months ended April 2, 2016 and March 28, 2015, other charges related to non-recurring activities primarily consisted Viavi-specific incremental charges for professional fees and additional personnel costs to complete the separation as well as transformational initiatives such as the implementation of simplified automated processes, site consolidations, reorganizations, and the insourcing or outsourcing of activities. Additionally, the nine months ended April 2, 2016 included $3.5 million of non-recurring incremental severance and related costs upon the exit of a key executive.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 18. Restatement of Previously Issued Financial Statements
The restatement is to correct an error in the previously filed unaudited interim consolidated financial statements and has the effect of decreasing the Company’s reported income tax expense and increasing the Company’s reported net income for the three months ended April 2, 2016 by $1.4 million, and increasing both the Company’s reported income tax expense and reported net loss for the nine months ended April 2, 2016 by $3.0 million. The restatement relates to an error in the calculation of the unaudited interim income tax provision related to a foreign jurisdiction.
The following table presents previously reported and restated balances of affected line items in the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended April 2, 2016, the Consolidated Statements of Cash Flows for the nine months ended April 2, 2016, and the Consolidated Balance Sheet as of April 2, 2016.
Three Months Ended April 2, 2016 | Nine Months Ended April 2, 2016 | ||||||||||||||||||||||
As Reported | Adjustment | As Restated | As Reported | Adjustment | As Restated | ||||||||||||||||||
Consolidated Statements of Operations: | |||||||||||||||||||||||
Provision for income taxes | $ | 11.3 | $ | (1.4 | ) | $ | 9.9 | $ | 10.9 | $ | 3.0 | $ | 13.9 | ||||||||||
Income from continuing operations, net of taxes | 27.4 | 1.4 | 28.8 | 17.1 | (3.0 | ) | 14.1 | ||||||||||||||||
Net income (loss) | 32.4 | 1.4 | 33.8 | (28.3 | ) | (3.0 | ) | (31.3 | ) | ||||||||||||||
Net income (loss) per share - basic: | |||||||||||||||||||||||
Continuing operations | $ | 0.12 | $ | 0.01 | $ | 0.13 | $ | 0.07 | $ | (0.01 | ) | $ | 0.06 | ||||||||||
Net income (loss) | 0.14 | 0.01 | 0.15 | (0.12 | ) | (0.01 | ) | (0.13 | ) | ||||||||||||||
Net income (loss) per share - diluted: | |||||||||||||||||||||||
Continuing operations | $ | 0.12 | $ | — | $ | 0.12 | $ | 0.07 | $ | (0.01 | ) | $ | 0.06 | ||||||||||
Net income (loss) | 0.14 | — | 0.14 | (0.12 | ) | (0.01 | ) | (0.13 | ) | ||||||||||||||
Consolidated Statements of Comprehensive Income (Loss): | |||||||||||||||||||||||
Net income (loss) | $ | 32.4 | $ | 1.4 | $ | 33.8 | $ | (28.3 | ) | $ | (3.0 | ) | $ | (31.3 | ) | ||||||||
Comprehensive income | 45.7 | 1.4 | 47.1 | 116.6 | (3.0 | ) | 113.6 | ||||||||||||||||
Consolidated Statements of Cash Flows(1): | |||||||||||||||||||||||
Net loss | $ | (28.3 | ) | $ | (3.0 | ) | $ | (31.3 | ) | ||||||||||||||
Income taxes payable | 8.3 | 3.0 | 11.3 | ||||||||||||||||||||
April 2, 2016 | |||||||||||||||||||||||
As Reported | Adjustment | As Restated | |||||||||||||||||||||
Consolidated Balance Sheet: | |||||||||||||||||||||||
Income taxes payable | $ | 14.5 | $ | 3.0 | $ | 17.5 | |||||||||||||||||
Total current liabilities | 233.5 | 3.0 | 236.5 | ||||||||||||||||||||
Accumulated deficit | (69,303.5 | ) | (3.0 | ) | (69,306.5 | ) | |||||||||||||||||
Total stockholders’ equity | 837.4 | (3.0 | ) | 834.4 | |||||||||||||||||||
(1) Net cash provided by operating activities during the nine months ended April 2, 2016 did not change as a result of this restatement.
Note 19. Subsequent Events
In May 2016, Management approved a restructuring plan primarily related to the consolidation of NSE’s R&D function in China, including the planned closure of the Company’s Beijing R&D center. This restructuring plan is part of the Company’s
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
ongoing commitment to create an agile and cost efficient organization. The Company anticipates that restructuring charges in the range of $5.0 million to $7.0 million will mostly be incurred in the fourth quarter of fiscal 2016, primarily consisting of employee related termination benefits.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated)
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,” “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 and the role we will play in those advancements; |
• | Our plans for growth and innovation opportunities; |
• | The anticipated costs, benefits and other impacts of the separation of the Lumentum business; |
• | 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, future sources of revenue, 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 the expected impact of such plans on our financial performance; 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 June 27, 2015.
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OUR INDUSTRIES AND QUARTERLY DEVELOPMENTS
Viavi Solutions Inc. (“Viavi,” also referred to as “the Company,” “we,” “our,” and “us”), formerly JDS Uniphase Corporation (“JDSU”), is a leading provider of software and hardware platforms and instruments that deliver end-to-end visibility across physical, virtual and hybrid networks. Our solutions provide precise intelligence and actionable insight from across the network ecosystem to optimize networks and support more profitable, higher-performing networks and quicker transition to next-generation technologies for our customers. Viavi is also a leader in anti-counterfeiting solutions for currency authentication and high-value optical components and instruments for diverse government and commercial applications.
On September 10, 2014, we announced plans to separate into two publicly traded companies:
• | an optical components and commercial lasers company, Lumentum Holdings Inc. (“Lumentum”), consisting of our Communications and Commercial Optical Products (“CCOP”) segment and the WaveReady product line formerly within our Network Enablement (“NE”) segment; and |
• | a network and service enablement and optical coatings company, renamed Viavi, consisting of our NE, Service Enablement (“SE”) and Optical Security and Performance Products (“OSP”) segments. |
On August 1, 2015, we completed the distribution of approximately 80.1% of the outstanding shares of Lumentum common stock to our stockholders (the “Separation”). We were renamed Viavi and, at the time of the distribution, retained ownership of approximately 19.9% of Lumentum’s outstanding shares. Following the Separation in the first quarter of fiscal 2016, the Company made changes to its segment measures to reflect how the CODM manages the business post-separation as described in “Note 17. Operating Segments.” These changes include (a) the evaluation of NE and SE segment performance based on gross margin and the evaluation of the Network and Service Enablement business (“NSE”) as a whole on operating margin, (b) the movement of the Video Assurance product line out of the NE segment and into the SE segment, and (c) the allocation of previously unallocated corporate-level costs associated with the shared-services function to our segment’s results. In addition, the historical results of operations and net assets have been recast to present the Lumentum business as discontinued operations as described in “Note 3. Discontinued Operations.” The results of the CCOP segment and the WaveReady product line within the NE segment have been excluded from the accompanying discussion and analysis within our results of operations. Segment information for all periods presented has been revised to be comparable with the above changes in the Company’s segment reporting measures.
To serve our markets we operate in the following business segments:
• | Network Enablement |
• | Service Enablement |
• | Optical Security and Performance Products |
Network Enablement
NE provides an integrated portfolio of testing solutions that access the network to perform build-out and maintenance tasks. These solutions include instruments, software and services to design, build, turn-up, certify, troubleshoot, and optimize networks. They also support more profitable, higher-performing networks and help speed time-to-revenue.
Our solutions address lab and production environments, field deployment and service assurance for wireless and wireline networks, including storage networks. Our test instrument portfolio is one of the largest in the industry, with hundreds of thousands of units in active use by major NEMs, operators and services providers worldwide. Designed to be mobile, these products include instruments and software that access the network to perform installation and maintenance tasks that help service provider technicians assess the performance of network elements and segments and verify the integrity of the information being transmitted across the network. These instruments are highly intelligent and have user interfaces that are designed to simplify operations and minimize the training required to operate them. Our NE solutions are also used by NEMs in the design and production of next-generation network equipment.
Viavi also offers a range of product support and professional services designed to comprehensively address our customers’ requirements. These services include repair, calibration, software support and technical assistance for our products. We offer product and technology training as well as consulting services. Our professional services, provided in conjunction with system integration projects, include project management, installation and implementation.
NE customers include wireless and fixed services providers, NEMs, government organizations and large corporate customers, such as major telecom, mobility and cable operators, chip and infrastructure vendors, storage-device manufacturers, storage-network and switch vendors, and deployed private enterprise customers. Our customers include Alcatel-Lucent International,
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América Móvil, S.A.B. de C.V., AT&T Inc., CenturyLink, Inc., Cisco Systems, Inc., Comcast Corporation, Lumentum Holdings Inc., Time Warner Inc., Verizon Communications Inc. and Vodafone Group Plc.
During the first quarter of fiscal 2016, we re-grouped our NE products and associated services from seven product groupings to three as described below:
Wireline: Primarily consisting of (a) Access and Cable products (formerly components of Media, Access and Content); (b) Fiber Instrument products (formerly a component of Fiber) and (c) Metro products (formerly a component of Ethernet).
Wireless: Consisting of Wireless products which were formerly a component of Mobility.
Lab: Primarily consisting of (a) Capacity Advisor products (formerly a component of Mobility); (b) Fiber Optical Transport Products (formerly a component of Fiber); (c) Optical Transport products (formerly a component of Ethernet); and (d) Storage Network Test products (formerly a component of Cloud and Data Center).
Additionally, following the Separation we no longer sell products or services from the WaveReady product line as discussed above. We also moved our Video Assurance products (formerly a component of Media, Access and Content) to our SE segment. For the purposes of providing year-over-year variance analysis in the Results of Operations section below we have reflected these changes for all prior periods presented so that they are comparable with our current groupings.
Service Enablement
SE provides embedded systems and enterprise performance management solutions that give global service providers, enterprises and cloud operators visibility into network, service and application data. These solutions - which primarily consist of instruments, microprobes and software - monitor, collect and analyze network data to reveal the actual customer experience and identify opportunities for new revenue streams and network optimization.
Our portfolio of SE solutions address the same lab and production environments, field deployment and service assurance for wireless and fixed communications networks, including storage networks, as our NE portfolio. Our solutions let carriers remotely monitor performance and quality of network, service and applications performance throughout the entire network. This provides our customers with enhanced network management, control, and optimization that allow network operators to initiate service to new customers faster, decrease the need for technicians to make on-site service calls, help to make necessary repairs faster and, as a result, lower costs while providing higher quality and more reliable services. Remote monitoring decreases operating expenses, while early detection helps increase uptime, preserve revenue, and helps operators better monetize their networks.
SE customers include the same wireless and fixed services providers, NEMs, government organizations, large corporate customers, and storage-segment customers that are served by our NE segment.
During the first quarter of fiscal 2016, we re-grouped our SE products and associated services from five product groupings to three as described below:
Enterprise: Consisting of our Enterprise products (no change from our former Enterprise group).
Wireless: Consisting of our Location Intelligence and RAN Solutions products.
Assurance: Primarily consisting of our (a) Legacy Assurance, Protocol Test and xSIGHT products (formerly components of Mobile, Assurance and Analytics); (b) Legacy Wireline products (formerly a component of Packet Portal); (c) Packet Portal products (formerly Packet Portal, excluding Legacy Wireline products); and (d) Video Assurance products (formerly included in our NE segment).
For the purposes of providing year-over-year variance analysis in the Results of Operations section below we have reflected these changes for all prior periods presented so that they are comparable with our current groupings.
Optical Security and Performance Products
OSP leverages its core optical coating technologies and volume manufacturing capability to design, manufacture, and sell products targeting anti-counterfeiting, consumer and industrial, government, healthcare and other markets
OSP’s security offerings for the currency market include OVP®, OVMP® and banknote thread substrates. OVP® enables a color-shifting effect used by banknote issuers and security printers worldwide for anti-counterfeiting applications on currency and other high-value documents and products. OVP® protects the currencies of more than 100 countries today. OSP also develops
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and delivers overt and covert anti-counterfeiting products that utilize its proprietary printing platform and are targeted primarily at the pharmaceutical and consumer-electronics markets.
Leveraging its expertise in spectral management and its unique high-precision coating capabilities, OSP provides a range of products and technologies for the consumer-electronics market, including, for example, optical filters for 3D sensing devices designed for gaming and other platforms.
OSP value-added solutions meet the stringent requirements of commercial and government customers in aerospace and defense. Viavi products are used in a variety of aerospace and defense applications, including optics for guidance systems, laser eye protection and night vision systems. These products, including coatings and optical filters, are optimized for each specific application.
OSP serves customers such as Excelitas Technologies Corporation, FLIR Systems, Kingston Digital, Lockheed Martin and SICPA.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Refer to “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 of Financial Condition and Results of Operations in our Fiscal 2015 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. As fiscal 2016 is a 53-week year compared to a 52-week year in fiscal 2015, the nine months ended April 2, 2016 contains an extra week of activity compared to the nine months ended March 28, 2015.The Company has restated its three and nine months ended April 2, 2016 income tax expense presented in the “Provision for Income Taxes (Restated)” section below. Refer to “Note 18. Restatement of Previously Issued Financial Statements” for more information.
The following table summarizes selected Consolidated Statements of Operations items (in millions, except for percentages):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
April 2, 2016 | March 28, 2015 | Change | Percent Change | April 2, 2016 | March 28, 2015 | Change | Percent Change | ||||||||||||||||||||||
Segment net revenue: | |||||||||||||||||||||||||||||
NE | $ | 123.1 | $ | 124.1 | $ | (1.0 | ) | (0.8 | )% | $ | 377.1 | $ | 374.6 | $ | 2.5 | 0.7 | % | ||||||||||||
SE | 35.2 | 39.9 | (4.7 | ) | (11.8 | )% | 120.0 | 137.2 | (17.2 | ) | (12.5 | )% | |||||||||||||||||
OSP | 62.1 | 48.4 | 13.7 | 28.3 | % | 185.1 | 142.3 | 42.8 | 30.1 | % | |||||||||||||||||||
Total net revenue | $ | 220.4 | $ | 212.4 | $ | 8.0 | 3.8 | % | $ | 682.2 | $ | 654.1 | $ | 28.1 | 4.3 | % | |||||||||||||
Amortization of acquired technologies | $ | 4.1 | $ | 9.0 | $ | (4.9 | ) | (54.4 | )% | $ | 13.0 | $ | 26.3 | $ | (13.3 | ) | (50.6 | )% | |||||||||||
Percentage of net revenue | 1.9 | % | 4.2 | % | 1.9 | % | 4.0 | % | |||||||||||||||||||||
Gross profit | $ | 131.3 | $ | 127.0 | $ | 4.3 | 3.4 | % | $ | 413.6 | $ | 389.0 | $ | 24.6 | 6.3 | % | |||||||||||||
Gross margin | 59.6 | % | 59.8 | % | 60.6 | % | 59.5 | % | |||||||||||||||||||||
Research and development | $ | 40.0 | $ | 42.1 | $ | (2.1 | ) | (5.0 | )% | $ | 126.0 | $ | 127.9 | $ | (1.9 | ) | (1.5 | )% | |||||||||||
Percentage of net revenue | 18.1 | % | 19.8 | % | 18.5 | % | 19.6 | % | |||||||||||||||||||||
Selling, general and administrative | $ | 80.6 | $ | 95.5 | $ | (14.9 | ) | (15.6 | )% | $ | 261.3 | $ | 285.2 | $ | (23.9 | ) | (8.4 | )% | |||||||||||
Percentage of net revenue | 36.6 | % | 45.0 | % | 38.3 | % | 43.6 | % | |||||||||||||||||||||
Amortization of other intangibles | $ | 3.6 | $ | 4.8 | $ | (1.2 | ) | (25.0 | )% | $ | 11.1 | $ | 14.7 | $ | (3.6 | ) | (24.5 | )% | |||||||||||
Percentage of net revenue | 1.6 | % | 2.3 | % | 1.6 | % | 2.2 | % | |||||||||||||||||||||
Restructuring and related charges | $ | (0.1 | ) | $ | 7.8 | $ | (7.9 | ) | (101.3 | )% | $ | 1.7 | $ | 18.0 | $ | (16.3 | ) | (90.6 | )% | ||||||||||
Percentage of net revenue | — | % | 3.7 | % | 0.2 | % | 2.8 | % | |||||||||||||||||||||
Gain on sale of investments | $ | 39.8 | $ | 0.1 | $ | 39.7 | 39,700.0 | % | $ | 39.8 | $ | 0.1 | $ | 39.7 | 39,700.0 | % | |||||||||||||
Percentage of net revenue | 18.1 | % | — | % | 5.8 | % | — | % | |||||||||||||||||||||
Net Revenue
Following the Separation, revenue from our service offerings exceeds 10% of our total consolidated net revenue and is presented separately in our Consolidated Statements of Operations. Service revenue primarily consists of maintenance and support, extended warranty, professional services and post-contract support in addition to other services such as rentals, loaners and repair services. When evaluating the performance of our segments, Management focuses on total net revenue, gross profit and operating income and not the product or service categories. Consequently, the following discussion of business segment performance focuses on total net revenue, gross profit, and operating income consistent with our approach for managing the business.
Three months ended April 2, 2016 and March 28, 2015
Net revenue increased by $8.0 million, or 3.8%, during three months ended April 2, 2016 compared to the same period a year ago. This increase was primarily due to an increase in our OSP segment, partially offset by decreases in our SE and NE segments as discussed below.
Product revenues increased $11.9 million, or 6.4%, during the three months ended April 2, 2016 compared to the same period a year ago, primarily due to higher demand for our Anti-Counterfeiting product line in our OSP segment driven by increased bank-note volume. Service revenues decreased $3.9 million, or 15.1%, during the three months ended April 2, 2016 compared to the
34
same period a year ago primarily due to a decline in support contract renewals for our more mature assurance portfolio solutions in our SE segment.
NE net revenue decreased by $1.0 million, or 0.8%, during the three months ended April 2, 2016 compared to the same period a year ago. This decrease was driven by $7.1 million of net revenue decreases in our Wireline and Wireless offerings primarily as the prior period reflected Wireline net revenue from a significant ramp for a one-time project from a key customer. This was partially offset by net revenue increases of $6.1 million from our Lab offerings primarily due to strength in our fiber lab and field test instruments driven by “Fiber-to-the-Home” and “fiber for wireless backhaul” deployments in North America and 100G deployments globally, as well as higher demand for storage network test and optical transport products.
SE net revenue decreased by $4.7 million, or 11.8%, during the three months ended April 2, 2016 compared to the same period a year ago. This decrease was primarily driven by $5.9 million of net revenue decreases from our Assurance and Wireless Solutions offerings primarily driven by a decline in our more mature Assurance solutions. This was partially offset by $1.2 million of net revenue increases from our Enterprise offerings.
OSP net revenue increased by $13.7 million, or 28.3%, during the three months ended April 2, 2016 compared to the same period a year ago. This increase was driven by net revenue increases from our Anti-Counterfeiting product line driven by cyclical demand for our currency products resulting from higher bank-note volume in the current period, coupled with net revenue growth in our Consumer and Industrial and Government product lines.
Nine Months Ended April 2, 2016 and March 28, 2015
Net revenue increased by $28.1 million, or 4.3%, during nine months ended April 2, 2016 compared to the same period a year ago. This increase was primarily due to increases in our OSP and NE segments, partially offset by a decrease in our SE segment as discussed below.
Product revenues increased $33.0 million, or 5.7%, during the nine months ended April 2, 2016 compared to the same period a year ago primarily due to higher demand for our Anti-Counterfeiting product line in our OSP segment driven by increased bank- note volume and an increase in revenue from our Lab offerings in our NE segment. Service revenues decreased $4.9 million, or 6.1%, during the nine months ended April 2, 2016 compared to the same period a year ago primarily due to a decline in revenue from our repair services for our NE segment.
NE net revenue increased by $2.5 million, or 0.7%, during the nine months ended April 2, 2016 compared to the same period a year ago. This increase was driven by $19.5 million of net revenue increases from our Lab offerings primarily due to strength in our fiber lab and field test instruments driven by “Fiber-to-the-Home” and “fiber for wireless backhaul” deployments in North America and 100G deployments globally as well as higher demand for our optical transport products. This was partially offset by $17.0 million of net revenue decreases from our Wireline and Wireless offerings primarily as the prior period reflected Wireline net revenue from a significant ramp for a one-time project from a key customer, coupled with lower repair services revenue in the current period.
SE net revenue decreased by $17.2 million, or 12.5%, during the nine months ended April 2, 2016 compared to the same period a year ago. This decrease was primarily driven by $20.7 million of net revenue decreases from our Assurance and Wireless Solutions offerings primarily driven by a decline in our more mature Assurance solutions. This was partially offset by $3.5 million of net revenue increases from our Enterprise offerings.
OSP net revenue increased by $42.8 million, or 30.1%, during the nine months ended April 2, 2016 compared to the same period a year ago. This increase was driven by net revenue increases primarily from our Anti-Counterfeiting product line driven by cyclical demand for our currency products resulting from higher bank-note volume in the current period, coupled with net revenue growth in our Consumer and Industrial and Government product lines.
Going forward, we expect to continue to encounter a number of industry and market risks and uncertainties that may limit our 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. For example, while the majority of our net revenue and expenses are denominated in U.S. dollars, a portion of our international operations are denominated in foreign currencies. Recently, the strengthening of the U.S. dollar relative to certain foreign currencies, namely the Euro, Brazilian Real and Canadian Dollar, negatively impacted reported revenue and reduced our reported expenses. Additionally, we have seen recent demand for our NE and SE products affected by macroeconomic uncertainty. We cannot predict when or to what extent these uncertainties will be resolved. Our revenues, profitability, and general financial performance may also be affected by: (a) strong pricing pressures due to, among other things, a highly concentrated customer base, increasing competition, particularly from Asia-based competitors, and a general commoditization trend for certain products; (b) high product mix variability in our NE and SE markets, which affects revenue and gross margin; (c) fluctuations in customer buying patterns, which cause demand, revenue and profitability volatility;
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and (d) the current trend of communication industry consolidation, which is expected to continue, that directly affects our NE and SE customer bases and adds additional risk and uncertainty to our financial and business projections. Additionally, we expect to continue to see a decline net revenue from our more mature Assurance products within our SE segment.
Revenue by Region and Significant Customers
We operate in three geographic regions: Americas, Asia-Pacific and Europe Middle East and Africa (“EMEA”). Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers. The following table presents net revenue by geographic region (in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||
April 2, 2016 | March 28, 2015 | April 2, 2016 | March 28, 2015 | ||||||||||||||||||||||||
Net revenue: | |||||||||||||||||||||||||||
Americas | $ | 111.8 | 50.7 | % | $ | 121.5 | 57.2 | % | $ | 352.4 | 51.7 | % | $ | 360.3 | 55.1 | % | |||||||||||
Asia-Pacific | 41.2 | 18.7 | % | 31.7 | 14.9 | % | 129.2 | 18.9 | % | 105.2 | 16.1 | % | |||||||||||||||
EMEA | 67.4 | 30.6 | % | 59.2 | 27.9 | % | 200.6 | 29.4 | % | 188.6 | 28.8 | % | |||||||||||||||
Total | $ | 220.4 | 100.0 | % | $ | 212.4 | 100.0 | % | $ | 682.2 | 100.0 | % | $ | 654.1 | 100.0 | % | |||||||||||
Net revenue from customers in the Americas during the three months ended April 2, 2016 and March 28, 2015 included net revenue from the United States of $96.4 million and $108.7 million, respectively. Net revenue from customers in the Americas during the nine months ended April 2, 2016 and March 28, 2015 included net revenue from the United States of $303.5 million and $305.1 million, respectively.
Net revenue from customers outside the Americas during the three months ended April 2, 2016 and March 28, 2015 represented 49.3% and 42.8% of net revenue, respectively. Net revenue from customers outside the Americas during the nine months ended April 2, 2016 and March 28, 2015 represented 48.3% and 44.9% 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 decreased by 0.2 percentage points during the three months ended April 2, 2016 from 59.8% in the same period a year ago to 59.6% in the current period. This decrease was primarily due to gross margin erosion in our SE segment, which decreased 14.4 percentage points compared to the same period a year ago, on lower product and service revenue and unfavorable product mix from the continued run-off of our more mature, but high margin, Assurance solutions coupled with gross margin dilution driven by the timing in which initial acceptances of solutions were received from customers near the end of the current period. This was partially offset by a $4.9 million reduction in amortization of developed technology driven by certain intangible assets becoming fully amortized during fiscal 2015 and improvement in gross margin within our OSP segment from a favorable product mix from higher anti-counterfeiting revenue in the current period.
Gross margin increased by 1.1 percentage points during the nine months ended April 2, 2016 from 59.5% in the same period a year ago to 60.6% in the current period. This increase was primarily due to a $13.3 million reduction in amortization of developed technology driven by certain intangible assets becoming fully amortized during fiscal 2015 and improvement in gross margin within our OSP segment from a favorable product mix from higher anti-counterfeiting revenue in the current period. This was partially offset by lower gross margin in our SE segment and a change in overall segment mix as our OSP segment, whose products generally carry a lower gross margin than our NE and SE products, represented a higher percentage of our total net revenue in the current 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-Pacific-based competition), are price sensitive and/or are affected by customer seasonal and mix variant buying patterns. We expect these factors to continue to result in variability of our gross margin.
Research and Development
R&D expense decreased by $2.1 million, or 5.0%, during the three months ended April 2, 2016 compared to the same period a year ago. This decrease was primarily driven by net cost savings realized from our strategic restructuring activities related to site consolidations and internal reorganizations to align our investment strategy following the Separation. As a percentage of net
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revenue R&D decreased by 1.7 percentage points during the three months ended April 2, 2016 compared to the same period a year ago as the Company continued to execute targeted cost savings initiatives.
R&D expense decreased by $1.9 million, or 1.5%, during the nine months ended April 2, 2016 compared to the same period a year ago. This decrease was primarily due to a $1.9 million in-process research and development (“IPR&D”) impairment charge in the prior year related to a fiscal 2014 acquisition, coupled with $1.5 million in net cost savings realized from our strategic restructuring activities related to site consolidations and internal reorganizations to align our investment strategy following the Separation. This was partially offset by incremental stock-based compensation of $0.8 million due to modification of equity awards in connection with the Separation and various other smaller incremental R&D expenses in the current period. As a percentage of net revenue R&D decreased by 1.1 percentage points during the nine months ended April 2, 2016 compared to the same period a year ago as the Company continued to execute targeted cost savings initiatives.
We believe that continuing our investments in R&D is critical to attaining our strategic objectives. 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 expense decreased by $14.9 million, or 15.6%, during the three months ended April 2, 2016 compared to the same period a year ago. This decrease was primarily due to (a) a $5.7 million net reduction in stock-based compensation primarily due to the impact of Separation related activities on equity awards, (b) a $5.1 million reduction in labor and facilities expenses driven by lower headcount and site consolidations associated with our strategic restructuring activities and ongoing cost reduction efforts and (c) a $2.7 million reduction in costs related to Viavi-specific activities to complete the Separation. As a percentage of net revenue SG&A decreased 8.4 percentage points during the three months ended April 2, 2016 compared to the same period a year ago, driven by our strategic cost reduction efforts to optimize our expense structure.
SG&A expense decreased by $23.9 million, or 8.4%, during the nine months ended April 2, 2016 compared to the same period a year ago. The decrease was primarily due to a $19.7 million reduction in labor, benefits and facilities expenses driven by lower headcount and site consolidations associated with our strategic restructuring activities and ongoing cost reduction efforts coupled with a $3.2 million net reduction in stock-based compensation primarily due to the impact of the Separation related activities on equity awards. As a percentage of net revenue SG&A decreased 5.3 percentage points during the nine months ended April 2, 2016 compared to the same period a year ago, driven by our strategic cost reduction efforts to optimize our expense structure.
We intend to continue to focus on reducing our SG&A expense as a percentage of net revenue. However, 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, expenses related to our separation of the business into two public companies and litigation expenses, which could increase our SG&A expenses and potentially impact our profitability expectations in any particular quarter.
Restructuring and Related Charges
From time to time we have initiated strategic restructuring events primarily intended to reduce costs, consolidate our operations, rationalize the manufacturing of our products and align our businesses in response to market conditions. We estimate annualized gross cost savings of approximately $17 million excluding any one-time charges as a result of the restructuring activities initiated in the past year. We have reinvested and plan to reinvest a portion of our cost savings into R&D and new products that we believe will further differentiate us in the marketplace. Refer to “Note 11. Restructuring and Related Charges” for more information.
During the three and nine months ended April 2, 2016, we incurred restructuring and related (benefits) charges of $(0.1) million and $1.7 million, respectively due to new and previously announced restructuring plans. During the three and nine months ended March 28, 2015, we incurred restructuring and related charges of $7.8 million and $18.0 million, respectively.
During the third quarter of fiscal 2016, we incurred restructuring and related benefits of $0.1 million. There were no new restructuring plans or significant additions to already existing plans during the third quarter of fiscal 2016. The benefits primarily relate to a reduction in the number of employees impacted by previously announced restructuring plans.
During the third quarter of fiscal 2015, we incurred restructuring and related charges of $7.8 million. These charges are primarily the result of the following:
• | In connection with the Company’s plan to split into two separate companies, in the second quarter of fiscal 2015, management approved a plan to eliminate certain positions in its Shared Service function. During the third quarter of fiscal 2015, management approved additional headcount under this plan, adding another 80 employees. As a result, a restructuring charge of $6.9 million was recorded for severance and employee benefits in the third quarter of fiscal 2015, |
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primarily in manufacturing and SG&A functions located in North America, Latin America, Europe and Asia. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the fourth quarter of fiscal 2016.
During the nine months ended April 2, 2016 we recorded $1.7 million in restructuring and related charges. The charges are a combination of new and previously announced restructuring plans and are primarily the result of the following:
• | We incurred a restructuring charge of $3.0 million primarily for severance and benefits for the NE and SE Agile Restructuring Plan announced in the second quarter of fiscal 2016. This charge was offset by a $1.3 million benefit primarily related to a reduction in the number of employees impacted by previously announced restructuring plans. |
During the nine months ended March 28, 2015, we recorded $18.0 million in restructuring and related charges. These charges are a combination of new and previously announced restructuring plans and are primarily the result of the following:
• | We incurred a restructuring charge of $16.1 million primarily for severance and benefits for the Separation related Restructuring Plan announced in the second and third quarters of fiscal 2015. |
Our restructuring and other lease exit cost obligations are net of sublease income or lease settlement estimates of approximately $3.1 million. 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. 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.
Provision for Income Taxes (Restated)
We recorded an income tax expense of $9.9 million and $13.9 million related to the income from continuing operations for the three and nine months ended April 2, 2016, respectively. We recorded an income tax expense of $4.8 million and $19.1 million related to the loss from continuing operations for the three and nine months ended March 28, 2015, respectively.
The income tax expense related to the income (loss) from continuing operations recorded for the three and nine months ended April 2, 2016 and March 28, 2015 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss for the respective year. In addition, for the three and nine months ended April 2, 2016 our income tax provision includes a tax expense of $7.6 million and a tax benefit of $14.6 million, respectively, related to the income tax intraperiod tax allocation rules for discontinued operations and other comprehensive income. The income tax expense related to the income from continuing operations for the nine months ended April 2, 2016 also includes a tax expense of $8.9 million related to a one-time increase in valuation allowance associated with deferred tax assets transferred to Lumentum in connection with the Separation.
The income tax expense related to the income (loss) from continuing operations recorded differs from the expected tax expense (benefit) that would be calculated by applying the federal statutory rate to our income (loss) from continuing operations before taxes primarily due to the increases in valuation allowance for deferred tax assets attributable to our domestic and foreign losses from continuing operations, the income tax benefit recorded in continuing operations under the income tax intraperiod tax allocation rules, and the increase in valuation allowance associated with deferred tax assets transferred to Lumentum in connection with the Separation.
At the beginning of the second quarter of fiscal 2016, we prospectively adopted the authoritative guidance on balance sheet classification of deferred taxes, which requires deferred tax assets and liabilities, and any related valuation allowance, to be classified as non-current on the balance sheet.
As of April 2, 2016 and June 27, 2015, our unrecognized tax benefits totaled $37.0 million and $37.4 million, respectively, and are included in deferred taxes and other non-current tax liabilities, net. We had $1.7 million accrued for the payment of interest and penalties at April 2, 2016. The unrecognized tax benefits that may be recognized during the next twelve months are approximately $0.1 million.
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Gain on Sale of Investments
During the three months ended April 2, 2016, we sold 2.5 million shares of the 11.7 million shares of Lumentum common stock which was retained as part of the Separation and reclassified out of Accumulated other comprehensive income (loss) a $39.7 million realized gain, net of a $1.0 million income tax effect related to the intraperiod tax allocation rules. The gain and the income tax effect are included in “Gain on sale of investments” and “Provision for income taxes,” respectively, in the Consolidated Statement of Operations for the three and nine months ended April 2, 2016.
Discontinued Operations
Our discontinued operations activities during the three and nine months ended April 2, 2016 and March 28, 2015, related to the Separation on August 1, 2015 and current period activities related to the 2013 sale of the hologram business (“Hologram Business”).
Lumentum Separation
As a result of the Separation, the financial results of Lumentum are presented as discontinued operations for the three and nine months ended April 2, 2016 and March 28, 2015. Net income (loss) attributable to the Lumentum discontinued operations was $5.0 million and $(45.4) million during the three and nine months ended April 2, 2016 and $22.6 million and $51.3 million during the three and nine months ended March 28, 2015, respectively.
Hologram Business Disposition
During the nine months ended April 2, 2016, we recorded $0.3 million of net income from discontinued operations related to the Hologram Business related to proceeds received following a favorable arbitration ruling to resolve a dispute regarding the amount we were owed under an earnout clause in connection with the sale in 2013.
Operating Segment Information (in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
April 2, 2016 | March 28, 2015 | Change | Percentage Change | April 2, 2016 | March 28, 2015 | Change | Percentage Change | ||||||||||||||||||||||
Network Enablement | |||||||||||||||||||||||||||||
Net revenue | $ | 123.1 | $ | 124.1 | $ | (1.0 | ) | (0.8 | )% | $ | 377.1 | $ | 374.6 | $ | 2.5 | 0.7 | % | ||||||||||||
Gross profit | 80.7 | 83.2 | (2.5 | ) | (3.0 | )% | 247.0 | 248.0 | (1.0 | ) | (0.4 | )% | |||||||||||||||||
Gross margin | 65.6 | % | 67.0 | % | 65.5 | % | 66.2 | % | |||||||||||||||||||||
Service Enablement | |||||||||||||||||||||||||||||
Net revenue | 35.2 | 39.9 | (4.7 | ) | (11.8 | )% | 120.0 | 137.2 | (17.2 | ) | (12.5 | )% | |||||||||||||||||
Gross profit | 19.8 | 28.2 | (8.4 | ) | (29.8 | )% | 77.7 | 95.6 | (17.9 | ) | (18.7 | )% | |||||||||||||||||
Gross margin | 56.3 | % | 70.7 | % | 64.8 | % | 69.7 | % | |||||||||||||||||||||
Network and Service Enablement | |||||||||||||||||||||||||||||
Net revenue | 158.3 | 164.0 | (5.7 | ) | (3.5 | )% | 497.1 | 511.8 | (14.7 | ) | (2.9 | )% | |||||||||||||||||
Operating income | (0.1 | ) | 1.7 | (1.8 | ) | (105.9 | )% | 10.3 | 2.4 | 7.9 | 329.2 | % | |||||||||||||||||
Operating margin | (0.1 | )% | 1.0 | % | 2.1 | % | 0.5 | % | |||||||||||||||||||||
OSP | |||||||||||||||||||||||||||||
Net revenue | $ | 62.1 | $ | 48.4 | $ | 13.7 | 28.3 | % | $ | 185.1 | $ | 142.3 | $ | 42.8 | 30.1 | % | |||||||||||||
Operating income | 26.3 | 17.3 | 9.0 | 52.0 | % | 75.1 | 48.7 | 26.4 | 54.2 | % | |||||||||||||||||||
Operating margin | 42.4 | % | 35.7 | % | 40.6 | % | 34.2 | % | |||||||||||||||||||||
Network Enablement
During the three months ended April 2, 2016 NE gross margin decreased 1.4 percentage points from 67.0% in the same period a year ago to 65.6% in the current period. During the nine months ended April 2, 2016 NE gross margin decreased by 0.7 percentage points from 66.2% in the same period a year ago to 65.5% in the current period. For both the three and nine months ended April 2, 2016, this decrease was primarily due an unfavorable product mix in the current period.
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Service Enablement
During the three months ended April 2, 2016 SE gross margin decreased 14.4 percentage points from 70.7% in the same period a year ago to 56.3% in the current period. During the nine months ended April 2, 2016 SE gross margin decreased 4.9 percentage points from 69.7% in the same period a year ago to 64.8% in the current period. For both the three and nine months ended April 2, 2016, this gross margin erosion was primarily driven by lower revenue levels and unfavorable product mix from the continued run-off of our more mature, but high margin, Assurance solutions coupled with gross margin dilution driven by the timing in which initial acceptances of solutions were received from customers near the end of the current period.
Network and Service Enablement (“NSE”)
During the three months ended April 2, 2016 NSE operating margin decreased 1.1 percentage points from 1.0% in the same period a year ago to (0.1)% in the current period. This decrease in operating margin was primarily driven by gross margin erosion in our NE and SE segments as discussed above, partially offset by reductions in operating expenses as a percentage of net revenue driven by lower headcount as a result of strategic restructuring plans initiated in fiscal year 2015 and our ongoing cost reduction initiatives.
During the nine months ended April 2, 2016 NSE operating margin increased 1.6 percentage points from 0.5% in the same period a year ago to 2.1% in the current period. The increase in operating margin was primarily due to a decrease in operating expenses as a percentage of net revenue driven by lower headcount as a result of strategic restructuring plans initiated in fiscal year 2015 and our ongoing cost reduction initiatives. This was partially offset by a decline in NE and SE gross margin as discussed above.
Optical Security and Performance Products
OSP operating margin increased 6.7% during the three months ended April 2, 2016 from 35.7% in the same period a year ago to 42.4% in the current period. OSP operating margin increased 6.4% during the nine months ended April 2, 2016 from 34.2% in the same period a year ago to 40.6% in the current period. The increase in operating margin for both the three and nine month periods was primarily due to a significant increase in net revenue, coupled with favorable product mix and higher factory utilization.
Liquidity and Capital Resources
Our cash investments 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. Our policy allows an allocation to securities rated A-2/P-2, BBB/Baa2 or better, so long as such allocation below A-1/P-1, A/A2 but minimum A-2/P-2, BBB/Baa2 does not exceed 10% of any investment portfolio. 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 5.0% or $5.0 million, whichever is greater, of each of our investment portfolios may be concentrated in a single issuer other than the U.S. or sovereign governments or 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 recorded as other comprehensive (loss) income and 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 April 2, 2016 and virtually all debt securities held were of investment grade (at least BBB-/Baa3). As of April 2, 2016, U.S. entities owned approximately 73.2% of our cash and cash equivalents, short-term investments and restricted cash.
As of April 2, 2016, the majority of our cash investments 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 nine months ended April 2, 2016, we have not realized material investment losses but can provide no assurance that the value or the liquidity of our 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.
Nine Months Ended April 2, 2016
As of April 2, 2016 our combined balance of cash and cash equivalents, short-term investments, including marketable equity securities, and restricted cash increased by $179.4 million to $1,005.0 million from $825.6 million as of June 27, 2015.
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During the nine months ended April 2, 2016 cash provided by operating activities was $35.0 million, primarily resulting from $53.0 million of net income adjusted for both non-cash charges (e.g., depreciation, amortization and stock-based compensation) and changes in deferred tax and other tax liabilities balances which are non-cash in nature, partially offset by changes in operating assets and liabilities that used $18.0 million. Cash generated by operating activities was also impacted by our separation related activities. Changes in our operating assets and liabilities related primarily to a decrease in accrued expenses and other current and non-current liabilities of $28.3 million primarily due to separation related liabilities paid post Separation, a decrease in accrued payroll and related expenses of $22.0 million due to the timing of salary and bonus payments, a decrease in accounts payable of $8.4 million driven by the timing of payments and an increase in inventories of $2.2 million. This was partially offset by cash inflows from a decrease in accounts receivable of $22.6 million primarily driven by timing of collections of Lumentum related accounts receivable prior to the Separation, an increase in deferred revenue of $8.1 million from our SE segment solution offerings and an increase in income taxes payable of $8.3 million.
During the nine months ended April 2, 2016 cash provided by investing activities was $204.9 million, primarily resulting from $552.4 million of proceeds from the sales and maturities of available-for-sale investments and other assets (including proceeds of $62.1 million from the sale of 2.5 million shares of Lumentum common stock during the third quarter of fiscal 2016) and a $14.1 million cash inflow from a decrease in restricted cash, partially offset by $334.1 million of purchases of available-for-sale investments and $26.6 million of cash used for capital expenditures.
During the nine months ended April 2, 2016 cash used in financing activities was $143.9 million, primarily resulting from activities related to the Separation during the first quarter of fiscal 2016 and a $40.0 million share repurchase program entered into during the second quarter of fiscal 2016. In accordance with the Contribution Agreement, the Company made cash contributions of $137.0 million to Lumentum, which was partially offset by proceeds of $35.8 million from the sale of Lumentum Series A Preferred Stock to Amada Holdings Co., Ltd. (“Amada”) pursuant to a binding commitment under the Securities Purchase Agreement.
Nine Months Ended March 28, 2015
As of March 28, 2015 our combined balance of cash and cash equivalents, short-term investments and restricted cash decreased by $65.8 million to $815.5 million from $881.3 million as of June 28, 2014.
During the nine months ended March 28, 2015, cash provided by operating activities was $34.5 million, primarily resulting from $129.0 million of net income adjusted for both non-cash charges (e.g., depreciation, amortization and stock-based compensation) and changes in our deferred tax and other tax liabilities balances which are non-cash in nature, partially offset by changes in operating assets and liabilities that used $94.5 million. Changes in our operating assets and liabilities related primarily to a decrease in accrued payroll and related expenses of $38.7 million due to timing of salary and bonus payments, a decrease in accrued expenses and other current and non-current liabilities of $20.6 million, a decrease in accounts payable of $17.6 million due to higher payment activity, and an increase in accounts receivable of $14.3 million primarily due to collections timing.
During the nine months ended March 28, 2015, cash provided by investing activities was $1.2 million, primarily resulting from $524.9 million of proceeds from the sales and maturities of available-for-sale investments and other assets and a $5.0 million decrease in restricted cash, partially offset by $460.0 million of purchases of available-for-sale investments and $68.7 million of cash used for capital expenditures.
During the nine months ended March 28, 2015, cash used in financing activities was $13.8 million, primarily resulting from holdback payments of $22.2 million related to our acquisitions in fiscal 2014 and $4.7 million of cash used to repurchase our common stock, partially offset by $14.0 million of proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan
We believe that our existing cash balances and investments will be sufficient to meet our liquidity and capital spending requirements over the next twelve 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; |
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• | timing of payments to our suppliers; |
• | factoring or sale of accounts receivable; |
• | volatility in fixed income and credit market which impact the liquidity and valuation of our investment portfolios; |
• | volatility in foreign exchange market which impacts our financial results; |
• | possible investments or acquisitions of complementary businesses, products or technologies; |
• | issuance or repurchase of debt or equity securities, which may include open market purchases of our 2033 Notes prior to their maturity or of our common stock; |
• | potential funding of pension liabilities either voluntarily or as required by law or regulation; and |
• | compliance with covenants and other terms and conditions related to our financing arrangements; |
Contractual Obligations
Following the separation of Lumentum, our contractual commitments were reduced by the amounts transferred to Lumentum as previously disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 27, 2015. There were no other material changes to our existing contractual commitments during the third quarter of fiscal 2016, except for those occurring in the normal course of business.
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 Equity Incentive Plan
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. Refer to “Note 14. Stock-Based Compensation” for more information.
Pension and Other Post-retirement Benefits
We sponsor significant pension plans for certain past and present employees in the United Kingdom (“U.K.”) and Germany. We are also responsible for the non-pension post-retirement benefit obligation assumed from a past acquisition. Most of these plans have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with acquisitions during fiscal 2010. The U.K. plan is partially funded and the German plans, which were initially established as “pay-as-you-go” plans, are unfunded. As of April 2, 2016, our pension plans were under funded by $88.5 million since the PBO exceeded the fair value of its plan assets. Similarly, we had a liability of $1.1 million related to our non-pension post-retirement benefit plan. Pension plan assets are managed by external third parties and we monitor the performance of our investment managers. As of April 2, 2016, the fair value of plan assets had increased approximately 1.1% since June 27, 2015, our most recent fiscal year end.
A key actuarial assumption in calculating the net periodic cost and the PBO is the discount rate. Changes in the discount rate impact the interest cost component of the net periodic benefit cost calculation and PBO due to the fact that the PBO is calculated on a net present value basis. Decreases in the discount rate will generally increase pre-tax cost, recognized expense and the PBO. Increases in the discount rate tend to have the opposite effect. We estimate a 50 basis point (“BPS”) decrease or increase in the discount rate would cause a corresponding increase or decrease, respectively, in the PBO of approximately $8.2 million based upon data as of June 27, 2015.
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 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. Refer to “Note 15. Employee Pension and Other Benefit Plans” for more details.
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Item 3. Quantitative and Qualitative Disclosure About Market Risks
We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Derivatives and other financial instruments are used to mitigate exposures subject to market risk. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
Foreign Exchange Risk
We utilize foreign exchange forward contracts and other instruments, including option contracts, to hedge foreign currency risk associated with foreign currency denominated monetary assets and liabilities, primarily certain short-term intercompany receivables and payables. Our foreign exchange forward contracts and other instruments are accounted for as derivatives whereby the fair value of the contracts are reflected as other current assets or other current liabilities and the associated gains and losses are reflected in Interest and other income (expense), net in the Consolidated Statements of Operations. Our hedging programs reduce, but do not eliminate, the impact of currency exchange rate movements. The gains and losses on those derivatives are expected to be offset by re-measurement gains and losses on the foreign currency denominated monetary assets and liabilities.
The following table provides information about our foreign currency forward contracts outstanding as of April 2, 2016. The forward contracts, most with a term of less than 120 days, were transacted near quarter end; therefore, the fair value of the contracts is not significant.
(in millions) | Contract Amount (Local Currency) | Contract Amount (USD) | ||||||
Canadian Dollar (contracts to sell CAD / buy USD) | CAD | 7.2 | $ | 5.5 | ||||
Chinese Renmimbi (contracts to buy CNY / sell USD) | CNY | 120.6 | 18.5 | |||||
British Pound (contracts to buy GBP / sell USD) | GBP | 14.8 | 21.3 | |||||
Euro (contracts to buy EUR / sell USD) | EUR | 90.1 | 101.9 | |||||
Singapore Dollar (contracts to sell SGD / buy USD) | SGD | 40.3 | 29.7 | |||||
Mexican Peso (contracts to buy MXN / sell USD) | MXN | 196.7 | 11.3 | |||||
Australian Dollar (contracts to sell AUD / buy USD) | AUD | 7.8 | 5.9 | |||||
Brazilian Real (contracts to sell BRL / buy USD) | BRL | 49.2 | 13.2 | |||||
Japanese Yen (contracts to sell JPY / buy USD) | JPY | 852.1 | 7.6 | |||||
Indian Rupee (contracts to sell INR / buy USD) | INR | 269.2 | 4.0 | |||||
South Korean Won (contracts to buy KRW / sell USD) | KRW | 6,200.0 | 5.3 | |||||
Swiss Franc (contracts to buy CHF / sell USD) | CHF | 3.7 | 3.8 | |||||
Swedish Krona (contracts to buy SEK / sell USD) | SEK | 20.2 | 2.5 | |||||
Total USD notional amount of outstanding foreign exchange contracts | $ | 230.5 | ||||||
The counterparties to these hedging transactions are creditworthy multinational banks. The risk of counterparty nonperformance associated with these contracts is not considered to be material. Notwithstanding our efforts to mitigate some foreign exchange risks, we do not hedge all of our foreign currency exposures, and there can be no assurances that our mitigating activities related to the exposures that we do hedge will adequately protect us against the risks associated with foreign currency fluctuations.
Investments
We maintain an investment portfolio in a variety of financial instruments, including, but not limited to, U.S. government and agency securities, corporate obligations, money market funds, asset-backed securities, and other investment-grade securities. The majority of these investments pay a fixed rate of interest. The securities in the investment portfolio are subject to market price risk due to changes in interest rates, perceived issuer creditworthiness, marketability, and other factors. These investments are generally classified as available-for-sale and, consequently, are recorded on our Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of Other comprehensive (loss) income. We did not hold any investments in auction rate securities, mortgage backed securities, collateralized debt obligations, or variable rate demand notes at April 2, 2016. Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk. The fair values of our fixed-rate securities decline if interest rates rise, while floating-rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may be less than expectations because of changes in interest
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rates or we may suffer losses in principal if we sell securities that have experienced a decline in market value because of changes in interest rates.
We seek to mitigate the credit risk of our portfolio of fixed-income securities by holding only high-quality, investment-grade obligations with effective maturities of 37 months or less. We also seek to mitigate marketability risk by holding only highly liquid securities with active secondary or resale markets. However, the investments may decline in value or marketability due to changes in perceived credit quality or changes in market conditions.
We are exposed to investment risk as it relates to changes in the market value of our investment in Lumentum’s common stock which is classified as an available-for-sale marketable equity security on the Consolidated Balance Sheet. The fair value of the equity investment in Lumentum will vary over time and is subject to a variety of market risks including: company performance, macro-economic, regulatory, industry, and systemic risks of the equity markets overall.
A sensitivity analysis was performed on our investment in Lumentum to assess the potential impact of fluctuations in stock price. Hypothetical declines in stock price of five percent and ten percent were selected based on potential near-term changes in the stock price that could have an adverse effect on our investment. As of April 2, 2016 the fair value of our investment in Lumentum common stock was $244.3 million. As of April 2, 2016, a decline in Lumentum’s stock price of five percent and ten percent would have resulted in a $12.2 million and $24.4 million decline, respectively, in the total fair value of our investment.
Debt
The fair value of our 2033 Notes is subject to interest rate and market price risk due to the convertible feature of the notes and other factors. Generally, the fair value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The fair value of the notes may also increase as the market price of Viavi stock rises and decrease as the market price of our stock falls. Changes in interest rates and Viavi stock price affect the fair value of the notes but do not impact our financial position, cash flows or results of operations. Based on quoted market prices, as of April 2, 2016, the fair value of the 2033 Notes was approximately $636.9 million. Refer to “Note 10. Debts and Letters of Credit” for more information.
Item 4. Controls and Procedures
Disclosure Controls and Procedures:
The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer previously concluded on May 10, 2016, that the Company's disclosure controls and procedures in effect as of April 2, 2016, were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
Subsequent to that evaluation, and in connection with the restatement discussed in Note 18 to the Consolidated Financial Statements included in Item 1 of this report and the filing of this Form 10-Q/A, the Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures, and concluded that, because of the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures were not effective as of April 2, 2016.
Material Weakness in Internal Control Over Financial Reporting
In connection with the restatement discussed in Note 18 to the Consolidated Financial Statements included in Item 1 of this report, management identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The Company did not maintain effective internal control over financial reporting in the determination of the interim income tax provision. Specifically, the internal controls with respect to interim income taxes were not designed at a precision level to identify the use of an inaccurate tax rate.
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Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Plan for Remediation of Material Weakness in Internal Control Over Financial Reporting
The Company will implement an enhanced process and design a control to ensure a more precise review of the interim income tax provision beginning in the first quarter of fiscal 2017. In accordance with the Company’s internal control over financial reporting compliance program, the material weakness designation cannot be remediated in full until the enhanced processes have been operational for a period of time and successfully tested. Such remediation is anticipated to be completed later in fiscal 2017.
PART II—OTHER INFORMATION
We are subject to a variety of claims and suits that arise from time to time in the ordinary course of our business. While management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact on its financial position, results of operations or statement of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on our financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of our Annual Report for the fiscal year ended June 27, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share repurchase activity during the three months ended April 2, 2016 was as follows:
Period | Total Number of Shares Purchased | Average Price Paid per share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||
January 3, 2016 to January 30, 2016 | 1,352,450.0 | (1) | $ | 6.05 | (1) | 1,352,450.0 | (1) | (1) | ||||
January 31, 2016 to February 27, 2016 | ||||||||||||
February 28, 2016 to April 2, 2016 | ||||||||||||
1,352,450.0 | $ | 6.05 | 1,352,450.0 | |||||||||
(1) In May 2014, the Company's Board of Directors authorized a stock repurchase program under which the Company may purchase shares of its common stock worth up to an aggregate purchase price of $100.0 million through open market or private transactions. In October 2015, the Board extended the previously authorized repurchase program to utilize the remaining unused dollar amount from the program of approximately $40 million. In November 2015, the Company entered into a $40.0 million accelerated share repurchase agreement (the “ASR”) with a financial institution that was completed during the third quarter of fiscal 2016. Upon making the upfront payment of $40.0 million, the Company received an initial delivery of 5.3 million shares from the financial institution during the second quarter of fiscal 2016. During the third quarter of fiscal 2016, the ASR was completed and a final delivery of 1.3 million shares was delivered based on the final settlement price of $6.05 per share.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
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None.
Item 6. Exhibits
The following documents are filed as Exhibits to this report:
Incorporated by Reference | Filed | |||||||||
Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith | |||||
10.1 | Employment Agreement between Oleg Khaykin and Viavi Solutions Inc. dated January 28, 2016 | 8-K | 10.1 | 2/2/16 | ||||||
10.2 | Viavi Solutions Inc. 2005 Acquisition Equity Incentive Plan | 8-K | 10.1 | 2/16/16 | ||||||
31.1 | Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | ||||||||
31.2 | Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||
101.INS | XBRL Instance | X | ||||||||
101.SCH | XBRL Taxonomy Extension Schema | X | ||||||||
101.CAL | XBRL Taxonomy Extension Calculation | X | ||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase | X | ||||||||
101.PRE | XBRL Taxonomy Extension Presentation | X | ||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 26, 2016 | VIAVI SOLUTIONS INC. | |
(Registrant) | ||
By: | /s/ AMAR MALETIRA | |
Name: | Amar Maletira | |
Title: | Executive Vice President and Chief Financial Officer | |
(Duly Authorized Officer and Principal Financial and Accounting Officer) | ||
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