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| JDSU > SEC Filings for JDSU > Form 10-K on 24-Aug-2009 | All Recent SEC Filings |
24-Aug-2009
Annual Report
Our Industries and 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 is also a leading provider of optical solutions for biomedical and environmental instrumentation, semiconductor processing, aerospace and defense, brand authentication, visual display and custom color product differentiation applications.
Our Communications Test and Measurement segment consists generally of:
• Lab and production test platforms used in the design, performance, and interoperability testing of network equipment for all major and emerging core, metro, cable, and access network technologies for customers such as Alcatel-Lucent, Ciena, Cisco, Huawei, Fujitsu, Nortel, Motorola, and Nokia Siemens Networks.
• Field test instrumentation and software used in the installation, provisioning, and maintenance of broadband voice, video, and data communication services for customers such as AT&T, China Telecom, Comcast, Deutsche Telecom, Telefonica, Telmex, and Verizon.
• Network and service assurance systems used to monitor and troubleshoot network performance and to optimize quality of service for customers such as Bell Canada, British Telecom, and TimeWarner.
Our Communications and Commercial Optical Products ("CCOP") segment consists generally of:
• Optical components, modules, and subsystems sold to manufacturers of network equipment used to create telecommunications and data communications networks such as Alcatel-Lucent, Ciena, Cisco, Ericsson, Fujitsu, Hewlett-Packard, Huawei, IBM, Nokia Siemens Networks, Nortel, and Tellabs.
• Design and production of lasers provided to OEMs for a wide variety of applications, such as biotechnology, graphics and imaging, remote sensing, and materials processing and precision machining. These are sold to customers such as Applied Biosystems (now part of Life Technologies Corporation), ASML, Beckman Coulter, Eastman Kodak, Electro Scientific Industries, General Dynamics, Han's Laser, and Panasonic.
• In addition, our photovoltaics ("PV") products include concentrated photovoltaic ("CPV") cells and receivers for generating energy from sunlight, as well as fiber optic-based systems for delivering and measuring electrical power.
Our Advanced Optical Technologies segment consists generally of:
• Security holograms that authenticate valuable documents and products, as well as security devices used to protect a wide range of products, such as transaction cards, personal documents issued by many governments, pharmaceuticals, and other consumer and industrial products. Leading pharmaceutical companies worldwide use JDSU solutions to protect their brands, as do major issuers of transaction cards.
• Precise, high-performance, optical thin-film coatings used in medical/environmental instrumentation, consumer electronics, office automation, and optical sensors for aerospace and defense applications sold to customers such as BAE Systems, ITT Industries, Dolby Laboratories, MasterCard and Lockheed Martin.
• Optically based color-shifting solutions used in security for currencies and high-value documents, anticounterfeiting measures, and custom color solutions for brand differentiation and enhancement. JDSU technology is used to protect the currencies of China, the European Union, the United States, and other governments around the world JDSU custom color product differentiation and brand enhancement solutions are used by customers such as DuPont and PPG
Overall, our communications and commercial optical products markets are notable for, among other things, their high concentration of customers at each level of the industry, extremely long design cycles and increasing competition from Asian (principally China-based) suppliers. One consequence of a highly concentrated customer base and increasing Asian competition is systemic pricing pressure at each level of the industry. Large capital investment requirements, long return on investment periods, uncertain business models and complex and shifting regulatory hurdles, among other things, currently combine to limit opportunities for new carriers and their system suppliers to emerge. Thus, we expect that high customer concentration, the attendant pricing pressure, and other effects on our communications markets will remain for the foreseeable future. Long design cycles mean that considerable resources must be spent to design and develop new products with limited visibility relative to the ultimate market opportunity for the products (pricing and volumes) or the timing thereof.
As a supplier of components and modules to the telecommunications industry, we feel these effects most acutely, as system designs must first be initiated at the carrier level, communicated to the systems provider and then communicated to us and our competitors. During system design periods, shifts in economic, industry, customer or consumer conditions could and often do cause redesigns, delays or even cancellations to occur. Communications industry design cycles are often challenging for companies without the financial and infrastructural resources to sustain the long periods between project initiation and revenue realization.
The advanced optical technologies markets and the laser business, while more diverse, share some of the customer concentration and design cycle attributes of our communications markets.
We are working aggressively on strategies to expand our markets, products, customers and distribution channels for several of our core competencies in these areas in order to, among other things, reduce our exposure to customer concentration and long design cycles across our company. As part of this strategy, we have expanded into the communications test and measurement segment, which has expanded our customer base and distribution significantly.
However, there remains a level of uncertainty due to economic conditions. For example, in North America telecom, a few of the largest providers have recently increased their spending while the smaller service providers implemented cautionary practices. We are continuing to see pullbacks in demand for lasers that enable semiconductor inspection and holograms that protect credit card authenticity.
Major business developments during fiscal 2009 include:
• Net revenue in fiscal 2009 decreased 15%, or $235.7 million, to $1,294.4 million from $1,530.1 million in fiscal 2008. Net revenue in fiscal 2009 consisted of $606.2 million, or approximately 47% of net revenue, from Communications Test and Measurement, $481.1 million, or approximately 37% of net revenue, from Communications and Commercial Optical Products, and $208.4 million, or approximately 16% of net revenue, from Advanced Optical Technologies. Communications Test and Measurement net revenue includes $(1.3) million of deferred revenue that is eliminated from consolidated revenue as a result of purchase accounting adjustments.
• Gross profit in fiscal 2009 decreased to 38% from 39% in fiscal 2008. The decrease in gross margin was primarily related to the reduction in revenue resulting from the general economic slowdown during the year and consequent cost pressures.
• Our combined research and development ("R&D") and selling, general and administrative ("SG&A") expenses decreased $69.2 million to $574.7 million from $643.9 million in fiscal 2008, but as a percent of net revenue, increased to 44% in fiscal 2009 from 42% in fiscal 2008. The decrease is primarily due to cost reduction initiatives to re-align our cost structure to the reduced demand levels resulting from the general economic slowdown.
• Impairment of goodwill in fiscal 2009 increased $704.7 million to $741.7 million from $37.0 million in fiscal 2008. The increase is due to the impact of weakening market conditions on our forecasts and a sustained, significant decline in our market capitalization to a level lower than our net book value.
Recent Accounting Pronouncements
SFAS No. 168
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162" ("SFAS 168"). SFAS 168 establishes the FASB Standards Accounting Codification ("Codification") as the source of authoritative U.S. generally accepted accounting principles ("GAAP") recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. SFAS 168 also replaces FASB Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles" given that once in effect, the Codification will carry the same level of authority. We do not anticipate that the adoption of this statement will have a material impact on our consolidated financial statement.
SFAS No. 167
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
No. 46(R)" ("SFAS 167"). SFAS 167 amends FASB Interpretation No. 46(R),
"Variable Interest Entities" for determining whether an entity is a variable
interest entity ("VIE") and requires an enterprise to perform an analysis to
determine whether the enterprise's variable interest or interests give it a
controlling financial interest in a VIE. Under SFAS 167, an enterprise has a
controlling financial interest when it has a) the power to direct the activities
of a VIE that most significantly impact the entity's economic performance and
b) the obligation to absorb losses of the entity or the right to receive
benefits from the entity that could potentially be significant to the VIE.
SFAS 167 also requires an enterprise to assess whether it has an implicit
financial responsibility to ensure that a VIE operates as designed when
determining whether it has power to direct the activities of the VIE that most
significantly impact the entity's economic performance. SFAS 167 also requires
ongoing assessments of whether an enterprise is the primary beneficiary of a
VIE, requires enhanced disclosures and eliminates the scope exclusion for
qualifying special-purpose entities. SFAS No. 167 is effective for us beginning
in the first quarter of fiscal 2011. We are currently evaluating the potential
impact, if any, of the adoption of SFAS 167 on our consolidated financial
statements.
SFAS No. 166
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets ("SFAS 166"), an amendment of SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The Board's objective in issuing this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. This Statement must be applied as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This Statement must be applied to transfers occurring on or after the
effective date. SFAS No. 166 is effective for us beginning in the first quarter of fiscal 2010. We do not anticipate that the adoption of this statement will have a material impact on our consolidated financial statement.
SFAS No. 165
In May 2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS 165"). SFAS 165 requires an entity to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet. For nonrecognized subsequent events that must be disclosed to keep the financial statements from being misleading, an entity will be required to disclose the nature of the event as well as an estimate of its financial effect, or a statement that such an estimate cannot be made. In addition, SFAS 165 requires an entity to disclose the date through which subsequent events have been evaluated. SFAS No. 165 was effective for us beginning in the fourth quarter of fiscal 2009 and was required to be applied prospectively. The adoption of SFAS 165 had no material effect on our consolidated financial statements.
FASB Staff Positions FAS 115-2 and FAS 124-2
In April 2009, the FASB issued FASB Staff Positions (FSPs) No. FAS 115-2 and FAS
124-2, "Recognition and Presentation of Other-Than-Temporary Impairments", FAS
157-4, "Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly", and FAS 107-1 and APB 28-1, "Interim Disclosures about
Fair Value of Financial Instruments". These FSPs address concerns about
(1) recording impairment charges on investments in debt instruments,
(2) measuring the fair value of financial instruments when the markets become
inactive and quoted prices may reflect distressed transactions, and
(3) disclosure of fair values of certain financial instruments in interim
financial statements. These FSPs were effective for us beginning in the fourth
quarter of fiscal 2009. The adoption of these FSPs had no material effect on our
consolidated financial statements.
FASB Staff Position FAS 141(R)-1
In April 2009, the FASB issued FASB Staff Position (FSP) No. FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies". The FSP addresses concerns raised by constituents about certain implementation issues related to the accounting for assets and liabilities arising from contingencies under FAS 141(R), "Business Combinations". Specifically, the FASB decided that the general requirements in FAS 141 for acquired contingencies should be carried forward without significant revision. Accordingly, under the FSP, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. Otherwise, companies would typically account for those acquired contingencies using existing guidance. This FSP is effective for us beginning in fiscal year 2010 but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date.
FSP 132(R)-1
In December 2008, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position (FSP) No. FAS 132(R)-1, "Employers' Disclosures about
Postretirement Benefit Plan Assets". This FSP amends SFAS No. 132(R) to provide
guidance on an employer's disclosures about plan assets of a defined benefit
pension or other postretirement plan. The FSP requires disclosures surrounding
how investment allocation decisions are made, including the factors that are
pertinent to an understanding of investment policies and strategies. Additional
disclosures include (a) the major categories of plan assets, (b) the inputs and
valuation techniques used to measure the fair value of plan assets, and (c) the
effect of fair value measurements using significant unobservable inputs (Level
3) on changes in plan assets for the period and the significant concentrations
of risk within plan assets. The disclosures shall be provided for fiscal years
ending after December 15, 2009. We are currently evaluating the impact of FSP
132(R)-1 when it becomes effective in fiscal year 2010.
FASB Staff Positions APB 14-1
In May 2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1, "Accounting for Convertible Debt Instruments That May be Settled in Cash Upon Conversion (Including Partial Cash Settlement)". FSB No. APB 14-1 applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. The FSP is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2008 and is to be applied retrospectively to all past periods presented-even if the instrument has matured, converted, or otherwise been extinguished as of the FSP's effective date. We will adopt FSP No. APB 14-1 in the first quarter of fiscal 2010.
Our adoption of FSP No. APB 14-1 affects the 1% Senior Convertible Notes due 2026 ("Convertible Notes"). We expect the adoption of FSP No. APB 14-1 will result in higher interest expense for fiscal 2006 through fiscal 2013, assuming the holders will require JDSU to repurchase the Convertible Notes at a cash price equal to 100% of the principal amount plus accrued and unpaid interest on May 15, 2013, the earliest date when the holders can exercise such right. The additional interest expense, excluding the corresponding impact of income taxes, to be recognized for fiscal 2007 through fiscal 2013 is estimated to be in the range from $15.0 million to $20.0 million. We also estimate the adoption of FSP No. APB 14-1 will result in a lower gain on repurchase of 1% Senior Convertible Notes for fiscal 2009 in the range of $20.0 million to $30.0 million. In addition, the Convertible Notes balance will be significantly reduced along with a corresponding increase in our Stockholders' Equity. As of the date of the filing of this Form 10-K, we are still in the process of finalizing the analysis on the overall impact on adoption, including the calculation of the impact of income taxes.
FASB Staff Positions FAS 142-3
In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, "Determination of the Useful Life of Intangible Assets". The final FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, "Goodwill and Other Intangible Assets". The FSP is intended to improve the consistency between the useful life of an intangible asset determined under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141 (revised 2007), "Business Combinations", and other US generally accepted accounting principles. The FSP is effective for us beginning in the first quarter of fiscal 2010. We believe the adoption of this FSP will have no material effect on our consolidated financial statements.
SFAS No. 141(R)
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations ("SFAS 141(R)"). SFAS 141(R) introduces significant changes in the accounting for and reporting of business combination. SFAS 141(R) continues the movement toward the greater use of fair values in financial reporting and increased transparency through expanded disclosures. It changes how business acquisitions are accounted for and will impact financial statements at the acquisition date and in subsequent periods. Further, certain of the changes will introduce more volatility into earnings and thus may impact a company's acquisition strategy. SFAS 141(R) is effective for us beginning in fiscal year 2010. Accordingly, any business combinations we engage in will be recorded and disclosed according to SFAS 141, until June 27, 2009. We expect SFAS 141R will have an impact on our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date.
FSP 157-2
In September 2006, FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157"), to provide enhanced guidance when using fair value to measure assets and liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value in U.S. GAAP and
expands disclosures about fair value measurements. SFAS 157 applies whenever other pronouncements require or permit assets or liabilities to be measured at fair value and, while not requiring new fair value measurements, may change current practices. In February 2008, the FASB issued Staff Positions 157-2 (FSP 157-2) amending FAS 157 to delay the effective date of SFAS 157 for certain non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. This FSP is effective for us beginning in the first quarter of fiscal 2010. We believe the adoption of this FSP will have no material effect on our consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, net revenue and expenses, and the related disclosures. We base our estimates on historical experience, our knowledge of economic and market factors and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand for our products and economic conditions. Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps significantly, from these estimates under different estimates, assumptions or conditions. We believe the following critical accounting policies are affected by significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the client, risk of loss has transferred to the client and client acceptance has been obtained, client acceptance provisions have lapsed, or we have objective evidence that the criteria specified in the client acceptance provisions have been satisfied. In situations where a formal acceptance is required but the acceptance only relates to whether the product meets its published specifications, revenue is generally recognized upon shipment provided all other revenue recognition criteria are met. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.
We reduce revenue for rebates and other similar allowances. Revenue is recognized only if these estimates can be reliably determined. We base our estimates on historical results taking into consideration the type of client, the type of transaction and the specifics of each arrangement.
In addition to the aforementioned general policies, the following are the specific revenue recognition policies for multiple-element arrangements and for each major category of revenue.
Hardware
Revenue from hardware sales is generally recognized when the product is shipped to the customer and when there are no unfulfilled company obligations that affect the customer's final acceptance of the arrangement. Any cost of warranties and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized. Revenue from rentals and operating leases is recognized on a straight-line basis over the term of the rental or lease.
Multiple-Element Arrangements
We enter into multiple-element revenue arrangements, which may include any combination of hardware, software and services. Certain of our networking and communications products are integrated with software that
is not considered more than incidental to the functionality of the equipment. We believe that this equipment is not considered software related and would therefore be excluded from the scope of American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-2, "Software Revenue Recognition" ("SOP 97-2"). Accordingly, we allocate the fair value of the equipment when sold with software according to the FASB Emerging Issues Task Force Abstracts No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). The value of the arrangement, less the allocated hardware is then considered within the scope of SOP 97-2.
To the extent that a deliverable(s) in a multiple-element arrangement is subject to specific guidance (for example, software that is subject to SOP 97-2) on whether and/or how to separate multiple-deliverable arrangements into separate units of accounting (separability) and how to allocate value among those separate units of accounting (allocation), that deliverable(s) is accounted for in accordance with such specific guidance. A multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met:
• The delivered item(s) has value to the client on a standalone basis.
• There is objective and reliable evidence of the fair value of the undelivered item(s).
• If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of us.
If these criteria are not met, revenue is deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit's relative fair value. There may be cases, however, in which there is objective and reliable evidence of fair value of the undelivered item(s) but no such evidence for the delivered item(s). . . .
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