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JDSU > SEC Filings for JDSU > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for JDS UNIPHASE CORP /CA/

Form 10-Q for JDS UNIPHASE CORP /CA/


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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;

† our belief that the Company is well positioned to benefit from certain industry trends and advancements, and our expectations of the role we will play in those advancements;

† our plans for growth and innovation opportunities;

† our plans to continue to operate as a Company comprised of a portfolio of businesses with a focus on optical and broadband innovation;

† financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, 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

† 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 30, 2012.

OUR INDUSTRIES AND QUARTERLY DEVELOPMENTS

JDSU provides communications test and measurement solutions and optical products for telecommunications service providers, cable operators, and network equipment manufacturers. JDSU's diverse technology portfolio also fights counterfeiting and enables commercial lasers for a range of applications.

To serve its markets, JDSU operates in the following business segments:
CommTest, CCOP, and OSP.

Communications Test and Measurement

CommTest is a leading provider of instruments, software and services for the development and deployment of high-speed mobile and fixed communication networks.

JDSU CommTest solutions lower operating expenses, reduce customer turnover, increase productivity across each critical phase of the network life cycle including research and development, production, deployment, and customer experience management ("CEM"), and speed time-to-revenue by accelerating the deployment of new services. JDSU enables the effective management of


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services, such as Voice over Internet Protocol (VoIP), 4G/LTE and Internet Protocol TV (IPTV), by providing visibility into the end-user experience and also by providing repair, calibration, instrument management, and other services to aid its customers in the rapid deployment and repair of networks and services.

JDSU test solutions address lab and production (capacity expansion, 40G/100G), field deployment (network build and triple-play services), and service assurance (quality of experience) for Ethernet and IP services over cable, wireless, and fixed/telecom networks. JDSU also provides protocol test solutions for the development and field deployment of storage and storage-network technologies.

JDSU CommTest is evolving into a world class network enablement leader, focusing investments on software and solutions offerings in high growth markets, while leveraging its instruments portfolio. These strategic investments will be placed globally to meet end customer demand.

JDSU CommTest customers include the world's largest communications service providers, communications equipment manufacturers, government organizations, and large corporate customers. These include major telecom and cable operators such as AT&T, Bell Canada, Bharti Airtel Limited, British Telecom, China Mobile, China Telecom, Chunghwa Telecom, Comcast, CSL, Deutsche Telecom, France Telecom, Saudi Telecom Company, TalkTalk, Telefónica, Telmex, TimeWarner Cable, and Verizon. JDSU test and measurement customers also include many of the network-equipment manufacturers served by our CCOP segment, including Alcatel-Lucent, Ciena, Cisco Systems, Fujitsu, and Huawei. JDSU test and measurement customers also include chip and infrastructure vendors, storage-device manufacturers, storage-network and switch vendors, and deployed private enterprise customers. Storage-segment customers include Brocade, Cisco Systems, and EMC.

Communications and Commercial Optical Products

CCOP is a leading provider of products and technologies used in the optical communications and commercial laser markets.

CCOP optical communications products include a wide range of components, modules, subsystems, and solutions for two market segments: telecommunications, including access (local), metro (intracity), long-haul (city-to-city and worldwide), and submarine (undersea) networks; and enterprise data communications, including storage access networks (SANs), local area networks (LANs), and Ethernet wide-area networks (WANs). The products enable the transmission and transport of video, audio, and text data over high-capacity, fiber-optic cables. Transmission products primarily consist of optical transceivers, optical transponders, and supporting components such as modulators and source lasers including vertical-cavity surface-emitting lasers (VCSELs). Transport products primarily consist of amplifiers, ROADMs, and Super Transport Blades, and supporting components such as 980 nanometer (nm) pumps, passive devices, and array waveguides (AWGs).

Diode lasers from JDSU's CCOP segment combine with optical filters from the Company's OSP business segment to create a gesture recognition solution. Gesture recognition systems enable people to control technology with natural body gestures instead of using a remote, mouse or other device. Emerging gesture recognition systems simplify the way people interact with technology, and are first being used in applications for home entertainment and computing.

CCOP commercial laser products serve a wide variety of original equipment manufacturer ("OEM") applications from low- to high-power output and with ultraviolet (UV), visible, and IR wavelengths. The broad portfolio addresses the needs of laser clients in applications such as micromachining, materials processing, bioinstrumentation, consumer electronics, graphics, and medical/dental. Core laser technologies include continuous-wave, q-switched, and mode-locked lasers addressing application needs from continuous-wave to megahertz repetition rates. Our commercial optical products include diode, direct-diode, diode-pumped solid-state (DPSS), and gas lasers.

During the three months ended September 29, 2012, the CCOP business segment terminated the concentrated photovoltaic ("CPV") product line due to limited market opportunities.

Customers for Optical Communications products include Adva, Alcatel-Lucent, Ciena, Cisco Systems, Ericsson, Fujitsu, Huawei, Infinera, Nokia Siemens Networks, and Tellabs. Customers for JDSU commercial lasers include Amada, ASML, Beckman Coulter, Becton Dickinson, Disco, Electro Scientific Industries, and KLA-Tencor.

Optical Security and Performance Products

OSP provides innovative optical security and performance products targeted to customers in the anti-counterfeiting, consumer electronics, government, healthcare and other markets.


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OSP's flagship security offering, Optically Variable Pigment ("OVP®"), enables a color-shifting effect used by issuers of banknotes and security printers worldwide for anti-counterfeiting applications on currency and other high value documents and products. OVP® is used to protect the currencies of more than 100 countries today. In addition to OVP®, OSP has a developed a range of other offerings targeted toward the currency market including Optically Variable Magnetic Pigment ("OVMP®"), and banknote thread substrates. Complementing its offerings to the currency market, OSP also develops and delivers overt and covert anti-counterfeiting products targeting the pharmaceuticals and consumer electronics markets.

By leveraging its expertise in spectral management and its unique high precision coating capabilities, OSP plays a role in improving the performance attributes of a range of products serving the consumer electronics market. For example, OSP bandpass filters are currently used for gesture-recognition devices designed for the gaming market. Additionally, OSP manufactures components for phase and polarization control that enhance contrast for home theater projection systems. OSP also provides glasses and color filter wheels for 3D cinema applications.

OSP provides value-added solutions to meet the stringent requirements of commercial and government customers in the aerospace and defense industries. For customers in the aerospace industry, JDSU precision optical filters are a critical component in satellite and spacecraft power and temperature control systems. OSP also supplies antireflection coatings, beamsplitters, optical filters, laser optics, solar reflectors, and mirrors for a variety of applications including guidance systems, high-energy laser systems, battlefield eye protection, infrared night vision systems and secure optical communications for defense and security systems. Additionally, OSP supplies optical performance products for a variety of additional applications in the automotive, biomedical, entertainment and office automation markets.

The OSP segment serves customers such as 3M, Barco, Kingston, Lockheed Martin, Northrup Grumman, Pan Pacific, Seiko Epson, and SICPA.

On September 18, 2012, the Company entered into a definitive agreement to sell the Hologram Business and closed the sale on October 12, 2012. The Hologram Business primarily addressed the transaction card market. The Company has presented its current and historical Consolidated Statements of Operations and segment financials to reflect the sale of this business. The historical results of this business are reflected as discontinued operations in accordance with the authoritative guidance under US GAAP and are not included in JDSU's quarterly results from continuing operations for all periods presented.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See "Note 2. Recently Issued Accounting Pronouncements" regarding the effect of certain recent accounting pronouncements on our consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Item 7 on Management Discussion and Analysis in our Fiscal 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC").


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RESULTS OF OPERATIONS

The results of operations for the current period are not necessarily indicative of results to be expected for future periods. The following table summarizes selected Consolidated Statement of Operations items (in millions, except for percentages):

                                Three Months Ended
                          September 29,       October 1,                      Percentage
                              2012               2011            Change         Change
Segment Net Revenue:
CommTest                 $         169.5    $        184.9    $      (15.4 )         (8.3 )%
CCOP                               194.9             180.3            14.6            8.1
OSP                                 56.5              50.6             5.9           11.7
Net revenue              $         420.9    $        415.8    $        5.1            1.2 %

Gross profit             $         172.6    $        181.6    $       (9.0 )         (5.0 )%
Gross margins                       41.0 %            43.7 %

Research and
development                         61.6              59.3             2.3            3.9 %
Percentage of net
revenue                             14.6 %            14.3 %

Selling, general and
administrative                     104.7             110.3            (5.6 )         (5.1 )%
Percentage of net
revenue                             24.9 %            26.5 %

Amortization of
acquired technologies               17.1              14.3             2.8           19.6 %
Percentage of net
revenue                              4.1 %             3.4 %

Restructuring and
related charges                      2.7               1.5             1.2           80.0 %
Percentage of net
revenue                              0.6 %             0.4 %

Loss from
discontinued
operations, net of
tax                                 (1.8 )            (2.2 )           0.4          (18.2 )%
Percentage of net
revenue                              0.4 %             0.5 %

Net Revenue

Net revenue in the three months ended September 29, 2012 increased $5.1 million, or 1.2%, to $420.9 million from $415.8 million for the same period a year ago. The increase was primarily due to an increased demand for products in CCOP and OSP, partially offset by a decline in CommTest revenue.

Net revenue increased $14.6 million, or 8.1%, in CCOP during the three months ended September 29, 2012 compared to same period a year ago. This growth was primarily driven by increased demand and volume in our optical communications product lines, in particular our Circuit Packs, Tunables, Pluggables, Modulators, and High Power Lasers ("HPL") product lines. This increase was partially offset by ASP erosion and a decline in net revenue from certain legacy products.

Net revenue increased $5.9 million, or 11.7%, in OSP during the three months ended September 29, 2012 compared to same period a year ago. This growth was primarily driven by higher demand in currency products, partially offset by a decline in defense products.

Net revenue decreased $15.4 million, or 8.3%, in CommTest during the three months ended September 29, 2012 compared to same period a year ago. The decrease was primarily due to uncertainty in the macro-economic environment which reduced service providers' spending, particularly in Europe and North America, broadly across our CommTest product portfolio. Additionally, net revenue decreased due to less favorable fluctuations in foreign exchange rates and due to the wind down of legacy product portfolios. This decrease was partially offset by slight growth within the instruments product portfolio and the customer experience management ("CEM") product portfolio in the Asia-Pacific region.


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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, continued economic issues in Europe have led to uncertainty of demand in our CommTest and optical communications product portfolios and we cannot predict when or to what extent this uncertainty will last. Our revenues, profitability, and general financial performance may also be affected by: (a) strong pricing pressures, particularly within our optical communications markets, due to, among other things, a highly concentrated customer base, increasing Asia-based competition, and a general commoditization trend for certain products; (b) high product mix variability, particularly in our CCOP markets, which causes revenue and gross profit variability;
(c) continuing service provider seasonality, which causes demand, revenue and profitability volatility at each level of the communications industry; (d) the current trend of communication industry consolidations, which is expected to continue, that directly affects our CCOP and CommTest customer bases and adds additional risk and uncertainty to our financial and business predictability; and (e) activities related to our program of assembly manufacturing transitions in our CommTest segment that present additional supply chain and product delivery disruption risks, yield and quality concerns and risk of increased cost. These risks, while expected to diminish over the next several quarters, limit our ability to predict longer term revenue, profitability and general financial performance.

We operate primarily in three geographic regions: Americas, Europe Middle East and Africa ("EMEA") and Asia-Pacific. The following table presents net revenue by geographic regions (in millions):

                                             Three Months Ended
                                      September 29,       October 1,
                                           2012              2011
                 Net revenue:
                 Americas            $  209.8    49.8 % $ 207.7    50.0 %
                 EMEA                    97.0    23.0     100.9    24.2
                 Asia-Pacific           114.1    27.2     107.2    25.8
                 Total net revenue   $  420.9   100.0 % $ 415.8   100.0 %

Net revenue was assigned to geographic regions based on customer shipment locations. Net revenue for Americas included net revenue from the United States of $163.9 million and $169.5 million, respectively, for the three months ended September 29, 2012 and October 1, 2011. Net revenue from customers outside the Americas represented 50.2% and 50.0%, respectively, of net revenue for the three months ended September 29, 2012 and October 1, 2011. We expect revenue from customers outside of North America to continue to be an important part of our overall net revenue and net revenue growth opportunities.

Gross Margin

Gross margin in the three months ended September 29, 2012 decreased 2.7 percentage points to 41.0% from 43.7% compared to the same period a year ago. Gross margin declined primarily due to a less favorable product mix as higher margin product lines in CommTest represented a smaller proportion of consolidated net revenue compared to the same period a year ago as net revenue from CommTest declined by $15.4 million. In addition, during the three months ended September 29, 2012 CCOP incurred a $0.8 million charge related to the write-off of inventory and a $2.6 million charge for accelerated amortization of acquired technologies related to the plan to terminate the CPV product line. The decrease was partially offset by a favorable $1.9 million out-of-period adjustment recorded during the three months ended September 29, 2012 and an increase in gross margin in OSP compared to same period a year ago.

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 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")

R&D expense for the three months ended September 29, 2012 increased $2.3 million, or 3.9%, to $61.6 million from $59.3 million compared to the same period a year ago. As a percentage of revenue, R&D expense increased to 14.6% compared to 14.3% in the same period a year ago. The increase in R&D expense was primarily due to increased investments in new network enablement product platforms for the next generations of communication networks, partially offset by lower variable incentive pay due to a decrease in operating income.


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We believe that investment in R&D is critical to achieve our strategic objectives and we plan to continue to invest in R&D and new products to further differentiate us in the marketplace. In addition, we have devoted and will continue to devote significant engineering resources to assist with production, quality and delivery challenges which can impact our new product development activities.

Selling, General and Administrative ("SG&A")

SG&A expense for the three months ended September 29, 2012 decreased $5.6 million, or 5.1%, to $104.7 million from $110.3 million compared to the same period a year ago. As a percentage of revenue, SG&A expense decreased to 24.9% compared to 26.5% in the same period a year ago. The decrease in SG&A expense was primarily due to $7.4 million in charges recorded during the three months ended October 1, 2011 related to a litigation settlement and a reduction in variable incentive pay due to a decrease in operating income. These reductions were partially offset by various increases in SG&A charges, such as costs associated with mergers and acquisition activity and stock-based compensation.

We intend to continue to focus on reducing our SG&A expenses as a percentage of 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 and legal expenses in connection with litigation, which could increase our SG&A expenses and potentially impact our profitability expectations in any particular quarter. We are also increasing SG&A expenses in the near term to upgrade business infrastructure and systems.

Restructuring and Related Charges

We continue to take advantage of opportunities to further reduce costs through targeted restructuring efforts intended to consolidate and rationalize business functions and related locations based on core competencies and cost efficiencies, to align the business in response to market conditions. We estimate annualized cost savings of approximately $20.6 million excluding any one-time charges as a result of the restructuring activities initiated in the past year. See "Note 11. Restructuring and Related Charges" for more detail.

During the three months ended September 29, 2012, we incurred restructuring expenses of $2.7 million. The charges are a combination of new and previously announced restructuring plans and are primarily the result of the following:

† During the first quarter of fiscal 2013, management approved a plan to terminate the CPV product line within CCOP based on limited opportunities for market growth. As a result, a restructuring charge of $0.6 million was recorded towards severance and employee benefits for 13 employees in manufacturing, research and development and selling, general and administrative functions. As of September 29, 2012, no employees have been terminated. The employees being affected are located in North America, Europe and Asia. Payments related to remaining severance and benefits accrual are expected to be paid by the end of the second quarter of fiscal 2013.

† We also incurred restructuring and related charges from previously announced restructuring plans in the first quarter of fiscal 2013 relating to the following: (i) $0.5 million for transfer costs in CommTest which was the result of the repair outsourcing initiative approved by management during the fourth quarter of fiscal 2012 (ii) $0.5 million for the exit of two leased sites in CommTest for the plan approved during the fourth quarter of fiscal 2012 and
(iii) $1.1 million of additional severance and employee benefits arising primarily to adjust the accrual for restructuring plans announced in the fourth quarter of fiscal 2012 in CommTest.

During the first quarter of fiscal 2012, we recorded $1.5 million in restructuring and related charges. The charges are a combination of new and continuations of the previously announced restructuring plan and are primarily a result of the following:

† We re-organized CCOP by integrating the business functions and responsibilities into a single management structure to drive efficiency and segment profitability in light of then-current economic conditions. As a result, a restructuring charge of $1.1 million was recorded towards severance and employee benefits for 40 employees in research and development and selling, general and administrative functions. The affected employees were located in North America and Asia. Payments related to severance and benefits were paid by October 2011.

† We also incurred restructuring and related charges from previously announced restructuring plans, in the first quarter of fiscal 2012, relating to:
(i) $0.3 million of severance and employee benefits from continued implementation of the EMEA early retirement program; (ii) $0.9 million for manufacturing transfer costs in CommTest and OSP which were the result of the transfer of certain production processes into existing sites in the U.S. or to contract manufacturers; and (iii) a $0.8 million benefit, net arising primarily to adjust the accrual for restructuring plans announced in the third and fourth quarters of fiscal 2011 in CommTest that did not materialize due to management's decision to re-locate employees and realize co-location efficiencies and accrue for exit of one of the facilities.

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