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| JDSU > SEC Filings for JDSU > Form 10-Q on 5-May-2009 | All Recent SEC Filings |
5-May-2009
Quarterly Report
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 that,"
"believes," "can impact," "continue to," "estimates," "expects to," "intends,"
"may," "plans," "potential," "projects," "to be," "will be," "will continue to
be," "continuing," "ongoing," or the negative thereof or other comparable
terminology regarding beliefs, plans, expectations or intentions regarding the
future. Forward-looking statements include statements regarding: our
expectations related to the impact of recent accounting pronouncements on our
consolidated financial statements; our expectation related to lease expenses
through fiscal 2018; our belief that the Company's current process for writing
down inventory appropriately balances the risk in the marketplace with a fair
representation of the realizable value of the Company's inventory; our
expectation that the zero coupon convertible notes will be retired within one
year; our plan to continue to take advantage of opportunities to further reduce
costs through targeted, customer-driven restructuring events; our expectation
that payments related to severance and benefits will be paid off by the third
fiscal quarter of 2010; our expectation to recognize $23.2 million of
unrecognized stock-based compensation cost related to stock options over an
estimated amortization period of 2.4 years; our expectation to amortize $0.5
million of unrecognized stock-based compensation cost related to our ESPP
through the first quarter of fiscal 2009; our expectation to amortize $52.7
million of unrecognized stock-based compensation cost related to Full Value
Awards over an estimated amortization period of 2.2 years; our expectation that
the Company will not have to contribute to defined benefit plans in fiscal 2009;
our expectation to incur cash outlays of approximately $4.6 million related to
our defined benefit pension plan in fiscal 2009; our belief that the ultimate
outcome of the Texas tax audit will not have a material adverse effect on our
financial position, cash flows or overall trends in results in operations; our
expectation that the Company's potential tax liability related to a Texas
franchise tax audit will be from $0.0 million to $37.0 million, plus interest
and penalties; management's belief that the that resolving claims against the
Company, individually or in the aggregate, will not have a material adverse
impact on its financial position, results of operations or statement of cash
flows; our expectation that we will continue to encounter a number of industry
and market structural risks and uncertainties that will limit our business
climate and market visibility; our expectation that risks related to
manufacturing transitions of our North American assembly manufacturing program
will continue and are expected to diminish over the next several quarters; our
expectation that the introduction of new product programs and introductions will
continue to incur higher start-up costs and increased yield and product quality
risk among other issues; our belief that investment in research and development
("R&D") is critical to attaining our strategic objectives; our continued efforts
to reduce total operating spending; our intention to continue to address our
selling, general and administrative ("SG&A") expenses and reduce these expenses
as and when opportunities arise; our expectations regarding future SG&A
expenses; our expectation that none of the non-core SG&A expenses will have a
material adverse impact on our financial condition; restructuring estimates
related to sublease income or lease settlements; our assumptions related to
pension and postretirement benefits; our belief that our assumptions related to
discount rate movements in connection with calculating benefit costs is
conservative; our estimates related to post-acquisition investment in research
and development and the projected completion date of post-acquisition research
and development; our belief that our existing cash balances and investments will
be sufficient to meet our liquidity and capital spending requirements at least
through the next 12 months; and our expectation that gains and losses on
derivatives will be offset by re-measurement gains and losses on the foreign
currency dominated assets and liabilities.
Management cautions that forward-looking statements 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 involve risks and uncertainties that could cause actual results to differ materially from those projected, including, without limitation, the following: inability to accurately predict product life cycles, technological and product changes, demand visibility for our products and other market conditions affecting our inventory; failure to reduce manufacturing costs through restructuring efforts; inaccurate estimates related to payments of severance and benefits to terminated employees; difficulty in estimating the amortization period of stock based compensation cost of stock option and our ESPP; difficulty in predicting the amortization period of Full Value Awards; inability to accurately predict the amount of money the Company must contribute to its pension plans as legally mandated; inability to accurately predict cash outlays related to defined benefit pension plan; inaccurate assessment of our tax liability as a result of acquisitions and tax audits; inherent uncertainty surrounding the litigation process and the fact that litigation could result in substantial cost and diversion of our management's attention; inability to accurately predict pricing pressures, changes to our customer base, the strength of our competition in Asia, product mix variability, seasonal buying patterns and excess device manufacturing capacity; delays in introducing new product programs; unexpected interruptions in manufacturing new products; inability to accurately predict market acceptance of new products; lack of resources set aside for investment in R&D; unanticipated SG&A expenses and inaccuracies as to the impact of SG&A expenses on the Company's financial condition; inherent difficulties in predicting lease settlements and income from subleases; inability to successfully implement strategic opportunities and expand our customer base, expertise and diversify our product portfolio; unanticipated complications with our acquisitions that weaken our core business; inability to grow through organic initiatives; difficulties in
quantifying the Company's obligation to contribute funds to pension and post-retirement benefits plans of acquired subsidiaries; changes in actuarial assumptions; unanticipated investment post-acquisition in research and development related to Picolight; inherent unpredictability related to the valuation of foreign currencies, inability to gauge further deterioration in the global economy and credit markets, and other factors set forth in "Risk Factors" and elsewhere herein. Further, our future business, financial condition and results of operations could differ materially from those anticipated by such forward-looking statements and are subject to risks and uncertainties including the risks set forth above and in Part II, Item 1A "Risk Factors" set forth in this Form 10-Q. 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/A for the year ended June 28, 2008.
OUR INDUSTRIES AND QUARTERLY DEVELOPMENTS
JDS Uniphase Corporation ("JDSU") is a leading provider of communications test and measurement solutions and optical products for telecommunications service providers, cable operators, and network equipment manufacturers. JDSU technologies also enable broadband and optical innovation in many essential industries such as biomedical and environmental instrumentation, semiconductor processing, aerospace and defense, and brand protection. In addition, our optical coatings are used in visual display and decorative product differentiation applications.
During the second quarter of fiscal year 2009, JDSU changed the reporting structure to combine the former All Others, Commercial Lasers business segment with the Optical Communications business segment and formed a new business segment, Communications and Commercial Optical Products. As a result, there are three reportable segments, Communications Test and Measurement, Communications and Commercial Optical Products, and Advanced Optical Technologies, as of March 28, 2009.
Communications Test and Measurement
JDSU provides instruments, service assurance systems and services for communications network operators and equipment manufacturers that deliver and/or operate broadband/IP networks (cable, fixed and mobile) deploying triple- and quad-play services (voice, video, data, and wireless). Our solutions help accelerate the deployment of new services, lower operating expenses, reduce customer turnover with improved quality of service, and increase productivity across each critical phase of the network lifecycle, including research and development, production, deployment, and service assurance. JDSU enables the effective management of services, such as video over Internet protocol (VoIP) and Internet protocol TV (IPTV), by providing visibility into the end-user experience, and also provides repair, calibration, instrument management and other services to aid its customers in the rapid deployment and repair of networks and services. JDSU test solutions address lab and production (capacity expansion, 40G), field service (triple-play deployments for cable, telecom, FTTx, and home networking) and service assurance (quality of experience, or QoE, for Ethernet and IP services, including cable, wireless and fixed/telecom networks).
JDSU customers for communications test and measurement solutions include the world's largest communications service providers, communications equipment manufacturers, government organizations, and corporations. This includes major telecom and cable operators such as AT&T, Bell Canada, British Telecom, China Telecom, Comcast, Deutsche Telecom, France Telecom, Telefonica, Telmex, TimeWarner, Verizon, and many others. JDSU test and measurement customers also include many of the network equipment manufacturers served by our optical communications group, including Alcatel-Lucent, Ciena, Cisco Systems, Fujitsu, Huawei, Motorola, and Nortel.
Communications and Commercial Optical Products
The Communications and Commercial Optical Products (CCOP) business segment is a leading provider of products and technology used in the optical communications and laser markets.
The Optical Communications group of this business segment provides components and subsystems used by communications equipment providers for telecommunications and enterprise data communications. These products enable the transmission and transport of video, audio and text data over high-capacity fiber optic cables. Transmission products primarily consist of optical transceivers, optical transponders, and their supporting components such as modulators and source lasers, like vertical-cavity surface-emitting lasers (VCSELs). Transport products primarily consist of amplifiers and ROADMS and their supporting components such as 980 nanometer (nm) pumps, passive devices, and array waveguides (AWGs). In fact, today's most advanced optical networks are built on our transport and transmission components, modules and subsystems.
JDSU optical communications products include a wide range of components,
modules, subsystems, and solutions to support and maintain customers in two
market segments: telecommunications, including access (local), metro
(intracity), long-haul (city-to-city and worldwide), and submarine (undersea)
networks; and enterprise data communications, including storage access networks
(SANs), local area networks (LANs), and Ethernet wide-area networks (WANs).
The Lasers business unit of CCOP provides lasers employed in a wide variety of original equipment manufacturer (OEM) applications, from low- to high-power output, ultraviolet (UV), visible, and IR wavelengths. Our broad portfolio addresses the needs of laser clients in markets and applications such as biotechnology, materials processing, semiconductor wafer processing, solar cell processing, graphics and imaging, remote sensing/ranging, and other precision machining.
Core laser technologies include continuous-wave (cw), q-switched, and mode-locked lasers addressing application needs from cw to megahertz repetition rates. Our commercial optical products include diode-pumped solid-state lasers, industrial diode lasers, gas lasers, and fiber-based lasers.
In addition, CCOP includes our Photovoltaics (PV) product line, which leverages
JDSU expertise in vertical integration, optical thin film coatings, components,
design customization, and lean manufacturing to offer concentrated photovoltaic
(CPV) solar cells and receivers that generate energy from concentrated sunlight,
and photonic power (PP) products that use laser light to transport energy over
optical fiber. JDSU photovoltaic (PV) technology serves two main applications:
power generation using multijunction solar cells, and power delivery systems
over optical fiber serving sensors in critical environments.
Customers of the JDSU Optical Communications group, such as Alcatel-Lucent, Ciena, Cisco Systems, Ericsson, Fujitsu, Hewlett-Packard, Huawei, IBM, Nokia Siemens Networks, Nortel, and Tellabs manufacture network equipment used to create telecommunications and data communications. Customers of the JDSU Lasers business unit include Applied Biosystems, ASML, Beckman Coulter, Disco, Eastman Kodak, Electro Scientific Instruments, General Dynamics, Han's Laser, KLA Tencor, Panasonic, and Sony. Customers of the PV business unit include Areva, ETS-Lindgren, Motorola, and Siemens. All of which use our fiber optic-based power products to drive and communicate with various measurement systems and sensors.
Advanced Optical Technologies
The Advanced Optical Technologies (AOT) business segment leverages its core technology strengths of optics and materials science to manage light and/or color effects. With deep experience in optical coating technology, AOT develops innovative solutions that meet the needs of a variety of markets-from holograms to space exploration. AOT consists of the Authentication Solutions group (ASG), the Custom Optics product group (COPG), and the Flex Products group.
Authentication Solutions provides multilayer product security techniques, which involve overt and covert product verification for protection against diversion, brand erosion, and lost revenue due to counterfeiting. These technologies safeguard brands in the pharmaceutical, consumer electronics, printing/imaging supplies, and fast-moving consumer good industries through innovative properties, including color-shifting pigments. Our holographic technologies, which manage light and color, also protect transaction cards issued by more than 20,000 financial institutions worldwide.
Custom Optics produces precise, high-performance, optical thin-film coatings for a variety of applications in government and aerospace, biomedical, telecommunications, office automation, entertainment, and other emerging markets. These applications include night vision and surgical goggles, satellite solar covers, medical instrumentation, medical instrumentation, information displays, office equipment, computer-driven projectors, and event lighting.
The Flex Products group includes Custom Color Solutions, a product line of unique solutions for product finishes and decorative packaging that can be applied to a wide variety of substrates. These include innovative, optically-based, light management solutions that provide product enhancement for brands in the pharmaceutical, automotive, consumer electronics, and fast-moving consumer goods industries. Flex Products also provides solutions for protecting the currency of more than 90 countries from counterfeiting.
The AOT business segment serves customers such as BAE Systems, Eastman Kodak, ITT, Mitsubishi, Northrup Grumman, SICPA, Siemens Medical, Sony, and Toshiba. JDSU technology is used to protect the currencies of China, the European Union, the United States, and other governments around the world. Leading pharmaceutical companies worldwide also use JDSU solutions to protect their brands. JDSU custom color solutions are used by customers such as BASF, DuPont, and PPG.
Overall Overview
• Net revenue in the three months ended March 28, 2009 decreased 27%, or $103.3 million, to $280.6 million from $383.9 million in the same quarter a year ago. Net revenue in the third quarter of fiscal 2009 consisted of $129.2 million, or approximately 46% of net revenue, from Communications Test and Measurement, $100.5 million, or approximately 36% of net revenue, from Communications and Commercial Optical Products, and $51.0 million, or approximately 18% of net revenue, from Advanced Optical Technologies. Communications Test and Measurement net revenue includes $(0.1) million of deferred revenue that is eliminated from consolidated revenue as a result of purchase accounting adjustments. One customer represented 10% or more of our net revenue during the three months ended March 28, 2009.
• Net revenue in the nine months ended March 28, 2009 decreased 11%, or $121.5 million, to $1,018.3 million from $1,139.8 million in the comparable period in the prior year. Net revenue in the nine months ended March 28, 2009 consisted of $470.7 million, or approximately 46% of net revenue, from Communications Test and Measurement, $390.4 million, or approximately 38% of net revenue, from Communications and Commercial Optical Products, and $157.6 million, or approximately 16% of net revenue, from Advanced Optical Technologies, Communications Test and Measurement net revenue includes $(0.4) million of deferred revenue that is eliminated from consolidated revenue as a result of purchase accounting adjustments. No customer represented 10% or more of our net revenue during the nine months ended March 28, 2009.
• Combined research and development ("R&D") and selling, general and administrative ("SG&A") expenses, as a percent of net revenue, increased to 49% and 43% in the three and nine months ended March 28, 2009 from 42% and 40% in the comparable period in the prior year.
RECENT ACCOUNTING PRONOUNCEMENTS
See "Note 2. Recent Accounting Pronouncements" regarding the effect of certain recent accounting pronouncements on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Goodwill and Long-Lived Assets Impairment
We review goodwill for impairment annually during the fourth quarter of the fiscal year or more frequently if events or circumstances indicate that an impairment loss may have occurred. In the second quarter of fiscal 2009, in connection with the impact of weakening market conditions on our forecasts and a sustained, significant decline in the market capitalization to a level lower than the net book value of the Company, we concluded that triggering events existed and were required to test long-lived assets and goodwill for impairment, in accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") and SFAS 142 "Goodwill and Other Intangible Asset" ("SFAS 142") .
Under SFAS 144, our long-lived assets and liabilities are grouped at the lowest level for which there is identifiable cash flow. Under SFAS 142, goodwill is tested for impairment at a reporting unit level. We have determined that, based on our cashflow structure, organizational structure and the financial information that is provided to and reviewed by management and the Board of Directors, our long-lived asset groups and reporting units are: Communications Test & Measurement (excluding da Vinci) ("CommTest"), da Vinci, Communications and Commercial Optical Products ("CCOP"), Custom Optics Product Group ("COPG"), Authentication Solutions Group ("ASG"), and Flex Product Group ("Flex").
Under SFAS 144, we estimated the future net undiscounted cash flows expected to be generated from the use of the long-lived asset groups and their eventual disposal and then compared the estimated undiscounted cash flows to the carrying amount of the long-lived asset groups. The cashflow period was based on the remaining useful lives of the primary asset in each long-lived asset group which ranges from 5 to 13 years. The result of the analysis indicated that the estimated undiscounted cash flows exceed the carrying amount of the long-lived asset groups, the long-lived asset groups are recoverable; therefore, an impairment does not exist, except for da Vinci. As a result of the test, we recorded da Vinci's long-lived asset impairment charge of $7.7 million which approximates the full amount of the intangible assets associated with this asset group in the second quarter of fiscal year 2009.
Under the first step of the SFAS 142 analysis, the income approach, which estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value based on comparable market prices, are considered. The fair value of the reporting units was determined based on the income approach and then compared to the results of the market approach for reasonableness. We assumed a cash flow period of 10 years, long-term annual growth rates of 4.1% to 20.5%, discount rates of 19.2% to 31.7% and terminal value growth rates of 4% to 5%. The discount rates are higher than the ones used in the last annual impairment test due to the increase in the inherent risks in the CommTest and CCOP products market that we serve. We believe that the assumptions and rates used in the interim impairment test under SFAS 144 and SFAS 142 are reasonable, but they are judgmental, and variations in any of the assumptions or rates could result in materially different calculations of impairment amounts. The sum of the fair values of the reporting units was reconciled to our current market capitalization plus an estimated control premium. Based on the first step of the analysis, we determined that the carrying amounts of all reporting units, except Flex, were in excess of their fair value. The result of the preliminary analysis indicated that there would be no remaining implied value attributable to goodwill in three of the reporting units and accordingly, we wrote off all $255 million of goodwill associated with these reporting units in the second quarter of fiscal year 2009. We were required to perform the second step analysis on CommTest and ASG reporting units to determine the amount of the impairment loss.
Under the second step of the SFAS 142 analysis, the implied fair value of goodwill requires valuation of a reporting unit's tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference. As a result, the Company impaired the value of its goodwill by approximately $692 million, which was recorded as a charge in the second quarter of fiscal 2009. This charge was an estimate subject to finalization of the second step pro-forma valuation for CommTest and ASG, which, due to the timing and complexity of the valuation calculations required, was not complete as of the date of the filing of the Form 10-Q for the quarter ended December 27, 2008. For CommTest and ASG, the second step goodwill impairment test estimate assumed the carrying value of assets approximated their fair value. With regard to CommTest reporting unit, the estimate of the goodwill impairment charge of $398 million approximated the difference between the reporting unit's fair value and its carrying value. With regard to ASG reporting unit, the estimate of the goodwill impairment charge of $40 million approximated the full amount of the goodwill associated with this reporting unit.
In the third quarter of fiscal year 2009, we completed the second step of the SFAS 142 analysis, which was started in the second quarter of fiscal year 2009, on CommTest and ASG reporting units. We recorded an additional impairment charge of $45.0 million for a total impairment of $736.9 million related to the SFAS 142 analysis started in the second quarter of fiscal year 2009. The additional impairment charge of $45.0 million consisted of $48.2 million with regard to CommTest reporting unit offset by an adjustment of $3.2 million with regard to ASG reporting unit.
Given the current macro economic environment and the uncertainties regarding the potential impact on our business, there can be no assurance that our estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of the long-lived asset and goodwill impairment tests during the second quarter of fiscal year 2009 will prove to be accurate predictions of the future. If our assumptions regarding forecasted cash flow, revenue and margin growth rates of certain long-lived asset groups and reporting units are not achieved, it is reasonably possible that an impairment review may be triggered for the remaining balance of goodwill and long-lived assets during the next annual review in the fourth quarter of fiscal 2009.
Fair Value Measurements
In September 2006, the Financial Accounting Standard Board ("FASB") issued Statement No. 157, Fair Value Measurements ("SFAS 157"). This statement does not require any new fair value measurements but clarifies the fair value definition, establishes a fair value hierarchy that prioritizes the information used to develop assumptions for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 clarifies that the fair value is the exchange price in an orderly transaction between market participants to sell the asset or transfer the liability in the market. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 input), then to quoted prices (in non-active markets or in active markets for similar assets or liabilities), inputs other than quoted prices that are observable for the asset or liability, and inputs that are not directly . . .
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