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| OPLK > SEC Filings for OPLK > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
switching and routing, monitoring and conditioning, and more recently, line
transmission applications. Our addressable markets include long-haul networks,
metropolitan area networks ("MANs"), local area networks ("LANs") and
fiber-to-the-home ("FTTH") networks. Our customers include telecommunications,
data communications and cable TV equipment manufacturers located around the
globe.
We offer our customers design, integration and optical manufacturing
solutions ("OMS") for the production and packaging of highly-integrated optical
subsystems and turnkey solutions, based upon a customer's specific product
design and specifications. We also offer solutions with lower levels of
component integration for customers that place more value on flexibility than
would be provided with turnkey solutions.
The acquisition of Optical Communication Products, Inc. ("OCP"), completed in
October 2007, has enabled Oplink to offer a portfolio of transmission products
that broaden the addressable markets as well as the range of solutions that we
can now offer our customers. Our transmission products consist of a
comprehensive line of high-performance fiber optic modules, including fiber
optic transmitters, receivers, transceivers, and transponders, primarily for use
in MAN, LAN, and FTTH applications. Fiber optic modules are pre-assembled
components that are used to build network equipment. Our transmission products
convert electronic signals into optical signals and back into electronic
signals, thereby facilitating the transmission of information over fiber optic
communication networks.
Use of Estimates and Critical Accounting Policies
The preparation of our condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure. On
an ongoing basis, we evaluate our estimates, including those related to product
returns, accounts receivable, inventories, intangible assets, warranty
obligations, restructuring accruals, contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates due to actual outcomes being different from those on which we
based our assumptions. These estimates and judgments are reviewed by management
on an ongoing basis and by the audit committee of our board of directors at the
end of each quarter prior to the public release of our financial results. We
believe the following critical accounting policies, and our procedures relating
to these policies, affect our more significant judgments and estimates used in
the preparation of our condensed consolidated financial statements.
We have identified the policies below as critical to our business operations
and understanding of our financial condition and results of operations. A
critical accounting policy is one that is both material to the presentation of
our financial statements and requires us to make difficult, subjective or
complex judgments that could have a material effect on our financial condition
and results of operations. These policies may require us to make assumptions
about matters that are highly uncertain at the time of the estimate, and
different estimates that we could have used, or changes in the estimate that are
reasonably likely to occur, may have a material impact on our financial
condition or results of operations. Our critical accounting policies cover the
following areas:
• revenue recognition and product returns;
• depreciation and amortization;
• warranty obligations;
• allowance for doubtful accounts;
• excess and obsolete inventory;
• impairment of investments;
• long-lived asset valuation;
• business combination;
• income taxes;
• stock compensation; and
• loss contingencies.
This is not a comprehensive list of all of our accounting policies.
As of the date of the filing of this quarterly report, we believe there have
been no material changes to our critical accounting policies and estimates
during these nine months ended March 31, 2009 compared to those disclosed in our
Annual Report on Form 10-K for the fiscal year ended June 30, 2008 as filed with
the SEC on September 12, 2008. Additional information about these critical
accounting policies may be found in the "Management's Discussion & Analysis of
Financial Condition and Results of Operations" section included in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2008.
Results of Operations
Revenues:
Three Months Ended Nine Months Ended
March 31, Percentage March 31, Percentage
2009 2008 Change Change 2009 2008 Change Change
(In thousands, except percentages)
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The decrease in revenues for the three and nine months ended March 31, 2009
compared to the three and nine months ended March 31, 2008 was primarily due to
decreased unit shipments of our ROADM optical switching and routing product,
which accounted for 52% and 64% of the decrease in revenues for the three and
nine months ended March 31, 2009 compared to the three and nine months ended
March 31, 2008, respectively. In addition, the decreased unit shipments of our
line transmission application product accounted for 41% and 33% of the decrease
in revenues for the three and nine months ended March 31, 2009 compared to the
three and nine months ended March 31, 2008, respectively. Our ROADM optical
switching and routing product, of which the primary and majority of the
components are obtained from third party vendors accounted for approximately 15%
of revenues for the three and nine months ended March 31, 2009, compared to 24%
and 25% for the three and nine months ended March 31, 2008, respectively. Our
line transmission application product accounted for approximately 30% and 33% of
revenues for the three and nine months ended March 31, 2009, compared to 32% and
33% for the three and nine months ended March 31, 2008, respectively.
The decrease in unit shipments in our other major product categories,
including multiplexer and conditioning and monitoring products further
contributed to the decrease in revenues for the three and nine months ended
March 31, 2009 compared to the three and nine months ended March 31, 2008. This
was partially offset by increased unit shipments of our optical amplification
products. The decrease in unit shipment was mainly due to a continued decrease
in spending activity in the telecommunications industry. A slight decline in
average selling prices, which is a characteristic of the industry, also
contributed to the decrease in revenues for the three and nine months ended
March 31, 2009 compared to the three and nine months ended March 31, 2008.
For the fourth quarter of fiscal 2009, we expect our revenues to be in the
range of $28 million and $32 million, generally flat with the third quarter of
fiscal 2009. Looking beyond the fourth quarter, there are a number of risks and
uncertainties that may put further downward pressure on our revenue and
profitability, or at least limit our ability to predict revenue and
profitability with any confidence. These risks and uncertainties include strong
pricing pressures due to competition and potential decreases in demand and
weakness in the worldwide telecommunications industry and economic environment
in general. A prolonged worldwide economic downturn may lead to lower sales
volume or reduced sales growth, lower sales prices or lower gross margins, which
would negatively impact our business and results of operations.
Gross Profit:
Three Months Ended Nine Months Ended
March 31, Percentage March 31, Percentage
2009 2008 Change Change 2009 2008 Change Change
(In thousands, except percentages)
Gross profit $ 8,679 $ 3,269 $ 5,410 165.5 % $ 23,414 $ 26,085 $ (2,671 ) -10.2 %
Gross profit margin 28.2 % 8.0 % 21.0 % 18.8 %
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The increase in gross profit for the three months ended March 31, 2009
compared to the three months ended March 31, 2008 was primarily due to lower
provision for excess and obsolete inventory, decreased material costs as a
result of lower revenues, and lower labor costs and manufacturing overhead
expenses, being partially offset by decreased revenues. The decrease in labor
costs and manufacturing overhead expenses reflected the costs savings associated
with the OCP's manufacturing being transitioned from higher cost facilities in
the United States to lower cost facilities in China, further integration of OCP
into Oplink, and other cost reduction initiatives. Our gross profit for the
three months ended March 31, 2009 was positively impacted by the sale of
inventory that had been previously fully reserved of $1.4 million compared to
the sale of inventory that had been previously fully reserved of $227,000 in the
three months ended March 31, 2008.
The decrease in gross profit for the nine months ended March 31, 2009
compared to the nine months ended March 31, 2008 was mainly due to lower
revenues, being partially offset by decreased material costs as a result of
lower revenues, lower provision for excess and obsolete inventory, and lower
labor costs and manufacturing overhead expenses. The decrease in labor costs and
manufacturing overhead expenses reflected the costs savings associated with
OCP's manufacturing being transitioned from higher cost facilities in the United
States to lower cost facilities in China, further integration of OCP into
Oplink, and other cost reduction initiatives. Our gross profit for the nine
months ended March 31, 2009 was positively impacted by the sale of inventory
that had been previously fully reserved of $2.6 million, compared to the sale of
inventory that had been previously fully reserved of $790,000 in the nine months
ended March 31, 2008.
Our gross margin increased to 28% for the three months ended March 31, 2009
from 8% for the three months ended March 31, 2008 primarily driven by lower
provision for excess and obsolete inventory and a higher utilization of
inventory that had been previously fully reserved. The slight improvement in
material costs, labor costs and manufacturing overhead expenses as a percentage
of revenue further contributed to the increase in our gross margin.
Our gross margin increased slightly for the nine months ended March 31, 2009
compared to the nine months ended March 31, 2008 mainly due to lower provision
for excess and obsolete inventory and a higher utilization of inventory that had
been previously fully reserved, being partially offset by higher material costs
as a percentage of revenue.
We anticipate our gross margin in the fourth quarter of fiscal 2009 to
decrease slightly compared to the third quarter of fiscal 2009.
Research and Development:
Three Months Ended Nine Months Ended
March 31, Percentage March 31, Percentage
2009 2008 Change Change 2009 2008 Change Change
(In thousands, except percentages)
Research and
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The decrease in research and development expenses for the three and nine
months ended March 31, 2009 compared to the three and nine months ended
March 31, 2008 was mainly driven by the cost savings associated with the
integration of OCP into Oplink, research and development programs being
transitioned from higher cost facilities in the United States to lower cost
facilities in China, and other cost reduction initiatives.
We believe that developing customer solutions at the prototype stage is
critical to our strategic product development objectives. In order to meet the
changing requirements of our customers, we will need to fund investments in
several concurrent product development projects. We expect our research and
development expense, excluding stock compensation expense, to decrease slightly
in the fourth quarter of fiscal 2009 compared to the third quarter of fiscal
2009.
Sales and Marketing:
Three Months Ended Nine Months Ended
March 31, Percentage March 31, Percentage
2009 2008 Change Change 2009 2008 Change Change
(In thousands, except percentages)
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The decrease in sales and marketing expenses for the three and nine months
ended March 31, 2009 compared to the three and nine months ended March 31, 2008
was mainly driven by the cost savings associated with the integration of OCP
into Oplink and lower sales commission expenses resulted from decreased
revenues. We expect our sales and marketing expense, excluding stock
compensation expense, to be steady in the fourth quarter of fiscal 2009 compared
to the third quarter of fiscal 2009.
General and Administrative:
Three Months Ended Nine Months Ended
March 31, Percentage March 31, Percentage
2009 2008 Change Change 2009 2008 Change Change
(In thousands, except percentages)
General and and
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The decrease in general and administrative expenses for the three and nine months ended March 31, 2009 compared to the three and nine months ended March 31, 2008 was mainly driven by the cost savings associated with the integration of OCP into Oplink and other cost reduction initiatives. In addition, lower stock compensation expense further contributed to the decrease in general and administrative expenses for the nine months ended March 31, 2009 compared to the nine months ended March 31, 2008. We expect our general and administrative expense, excluding stock compensation expense, to remain largely unchanged in the fourth quarter of fiscal 2009 compared to the third quarter of fiscal 2009.
Stock Compensation Expense:
Three Months Ended Nine Months Ended
March 31, Percentage March 31, Percentage
2009 2008 Change Change 2009 2008 Change Change
(In thousands, except percentages)
Stock
compensation
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Stock compensation expense recorded in cost of revenues, research and
development, sales and marketing and general and administrative is the
amortization of the fair value of share-based payments made to employees and
members of our board of directors, primarily in the form of stock options,
restricted stock and purchases under the employee stock purchase plan in
accordance with the provisions of SFAS No. 123(R). The fair value of stock
options, restricted stock granted and rights granted to purchase our common
stock under the employee stock purchase plan is recognized as expense over the
employee requisite service period.
Stock compensation expense remained largely unchanged for the three months
ended March 31, 2009 compared to the three months ended March 31, 2008. Stock
compensation expense decreased $2.4 million, or 36.2% for the nine months ended
March 31, 2009 compared to the nine months ended March 31, 2008. The acquisition
of OCP by Oplink resulted in the accelerated vesting of OCP stock options
pursuant to change-in-control provisions, which contributed $2.7 million in
stock compensation expense for the nine months ended March 31, 2008. Excluding
the impact of the OCP acquisition, stock compensation expense increased slightly
for the nine months ended March 31, 2009 compared to the nine months ended
March 31, 2008 as a result of additional grants to new and existing employees.
Stock compensation expense in fiscal 2009 includes the continued amortization
of previously-granted stock options. We expect our stock compensation expense in
the fourth quarter of fiscal 2009 to decrease slightly from the third quarter of
fiscal 2009.
Transitional Costs for Contract Manufacturing
A summary of accrued transitional costs for contract manufacturing in fiscal
2009 and 2008 is as follows (in thousands):
Consolidation of
Workforce Excess Facilities
Reduction and Other Charges Total
Balance at June 30, 2007 $ 1,234 $ - $ 1,234
Additional charge 553 1,732 2,285
Other adjustment (100 ) - (100 )
Cash payments (1,346 ) (1,732 ) (3,078 )
Balance at June 30, 2008 341 - 341
Cash payments (59 ) - (59 )
Balance at September 30, 2008 282 - 282
Other adjustment (199 ) 160 (39 )
Cash payments (83 ) - (83 )
Balance at December 31, 2008 - 160 160
Other adjustment and cash payments - - -
Balance at March 31, 2009 $ - $ 160 $ 160
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On November 1, 2006, OCP reached an agreement with SAE Magnetics (H.K.) Limited ("SAE"), a wholly-owned subsidiary of TDK Corporation, which enabled OCP to begin manufacture of certain of its product lines in China in July 2007. As a result of the decision to transfer the manufacturing of certain of our product lines from our Woodland Hills, California and OCPA facilities to SAE, we recorded an expense of $547,000 and $1.8
million for the three and nine months ended March 31, 2008, respectively. These
transitional charges, which are primarily related to estimated severance and
retention payments, along with expenses incurred to relocate certain fixed
assets and product qualification associated with the manufacturing of certain of
its product lines in China are recorded in accordance with SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," and SFAS
No. 112, "Employers' Accounting for Post Employment Benefits - an amendment of
No. 5 and No. 43". The transition was substantially completed by June 30, 2008.
We anticipate that the remaining balance will be paid within fiscal 2009.
Merger Fees
We recorded no merger fees for the three and nine months ended March 31,
2009. Merger fees for the three and nine months ended March 31, 2008 was a
credit of $371,000 and an expense of $5.6 million, respectively. Merger fees
primarily reflected the costs incurred in connection with the acquisition of
OCP, specifically, the cost of entering into employee retention programs, legal
expenses, and an investment banking fee.
Impairment Charges and Other Costs
Due to the ongoing financial liquidity crisis, the current economic
recession, changes to our operating results and forecasts, and a significant
reduction in our market capitalization, in the second quarter of fiscal 2009,
and in connection with our annual goodwill impairment testing, we performed an
impairment analysis in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets" and SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets".
We reviewed intangible assets that are subject to amortization for
recoverability of their carrying value. Recoverability of these assets is
measured by comparing their carrying amounts to future undiscounted cash flows
that the assets are expected to generate. As a result, we did not record any
impairment charges related to intangible assets.
Oplink had goodwill of $10.8 million at June 30, 2008, which was acquired as
part of Oplink's acquisition of OCP in fiscal 2008 and F3 and Fibercom in fiscal
2006. As a result of the impairment assessment performed in the second quarter
of fiscal 2009, we concluded that the carrying value of the goodwill exceeded
its implied fair value. This resulted in an impairment charge of $10.8 million
being recorded in the condensed consolidated statements of operations for the
nine months ended March 31, 2009.
An impairment charge of $517,000 was recorded for the nine months ended
March 31, 2008 primarily related to the intangible assets of F3.
Amortization of Intangible and Other Assets
Amortization of intangible and other assets was approximately $950,000 and
$976,000 for the three months ended March 31, 2009 and 2008, respectively, and
approximately $2.9 million and $2.4 million for the nine months ended March 31,
2009 and 2008, respectively. The increase in amortization expense for the nine
months ended March 31, 2009 compared to the nine months ended March 31, 2008 was
primarily attributable to the acquisition of the remaining 42% of OCP's
outstanding shares of common stock that we did not already own on October 31,
2007, which further increased the portfolio of intangible assets.
Interest and Other Income, Net
Three Months Ended Nine Months Ended
March 31, Percentage March 31, Percentage
2009 2008 Change Change 2009 2008 Change Change
(In thousands, except percentages)
Interest and
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The decrease in interest and other income for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 was primarily due to the declining average rate of return, being partially offset by increased balances of cash, cash equivalents, and short-term and long-term investments. The average rate of return for the three months ended March 31, 2009 was 1.1% . . .
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