Viavi Solutions(VIAV) - 2022 Q3 - Quarterly Report

PART I Financial Statements (Unaudited) This section presents Viavi Solutions Inc.'s unaudited consolidated financial statements for the three and nine months ended April 2, 2022, and April 3, 2021, detailing financial performance and position Consolidated Statements of Operations Viavi reported total net revenue of $315.5 million for Q3 FY22, a 4.0% increase year-over-year, and a $1.0 million net loss for the nine months ended April 2, 2022, primarily due to a $98.7 million loss on convertible note settlements Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | Three Months Ended April 2, 2022 | Three Months Ended April 3, 2021 | Nine Months Ended April 2, 2022 | Nine Months Ended April 3, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total net revenue | $315.5 | $303.4 | $957.1 | $888.0 | | Gross profit | $186.9 | $182.0 | $572.4 | $531.5 | | Income from operations | $40.8 | $35.9 | $137.0 | $109.5 | | Loss on convertible note settlement | $(6.4) | $— | $(98.7) | $— | | Net income (loss) | $19.2 | $17.2 | $(1.0) | $64.2 | | Diluted EPS | $0.08 | $0.07 | $— | $0.27 | Consolidated Balance Sheets As of April 2, 2022, Viavi's total assets decreased to $1,878.0 million, primarily due to reduced cash, while total liabilities decreased to $1,168.1 million mainly from debt settlement, resulting in total stockholders' equity of $709.9 million Consolidated Balance Sheet Highlights (in millions) | Account | April 2, 2022 | July 3, 2021 | | :--- | :--- | :--- | | Total Current Assets | $1,044.0 | $1,112.1 | | Cash and cash equivalents | $589.8 | $697.8 | | Goodwill, net | $388.9 | $396.5 | | Total Assets | $1,878.0 | $1,961.4 | | Total Current Liabilities | $259.7 | $747.4 | | Long-term debt | $706.4 | $224.1 | | Total Liabilities | $1,168.1 | $1,197.5 | | Total Stockholders' Equity | $709.9 | $763.9 | Consolidated Statements of Cash Flows For the nine months ended April 2, 2022, net cash provided by operating activities decreased to $104.5 million, while net cash used in investing was $51.2 million and financing activities used $151.3 million, primarily for stock repurchases and convertible note settlements Cash Flow Summary for Nine Months Ended (in millions) | Activity | April 2, 2022 | April 3, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $104.5 | $180.7 | | Net cash used in investing activities | $(51.2) | $(24.8) | | Net cash used in financing activities | $(151.3) | $(43.2) | | Net (decrease) increase in cash | $(106.9) | $134.6 | Notes to Consolidated Financial Statements The notes detail accounting policies, including ASU 2020-06 adoption, debt breakdowns from new senior notes and convertible note settlements, segment performance, stock repurchases, and legal contingencies like a $9.2 million pension-related lawsuit - The company adopted ASU 2020-06, simplifying accounting for convertible instruments, applied retrospectively to reclassify equity components to debt and reduce prior year interest expense[35][36][38] - In September 2021, the company issued $400.0 million of 3.75% Senior Notes due 2029 and settled significant portions of its 2023 and 2024 convertible notes, resulting in a $98.7 million loss for the nine-month period[88][102][103] - The company repurchased 12.7 million shares of its common stock for a total of $206.6 million during the nine months ended April 2, 2022, under two separate repurchase plans[121][123][20] Net Revenue by Segment (in millions) | Segment | Nine Months Ended April 2, 2022 | Nine Months Ended April 3, 2021 | | :--- | :--- | :--- | | Network Enablement (NE) | $623.6 | $533.9 | | Service Enablement (SE) | $79.3 | $67.5 | | Optical Security and Performance (OSP) | $254.2 | $286.6 | | Total Net Revenue | $957.1 | $888.0 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, highlighting a 4.0% revenue increase driven by NE and SE segments, while addressing COVID-19 impacts, supply chain constraints, inflationary pressures, and key financial activities like debt issuance and stock repurchases - Total net revenue increased by 4.0% to $315.5 million in Q3 FY22 compared to the prior year, driven by a 7.0% increase in NE and a 30.5% increase in SE, offset by an 8.1% decrease in OSP[189][192] - The company experienced higher than expected supply chain and commodity costs, including manufacturing, logistics, and procurement, due to inflationary pressure in the first nine months of fiscal 2022 and expects these high costs to continue[181] - During the nine months ended April 2, 2022, the company recorded a loss of $98.7 million related to the settlement of its 1.75% and 1.00% Senior Convertible Notes[215] - In December 2021, the company entered into a new $300 million senior secured asset-based revolving credit facility, maturing in December 2026, to be used for working capital and general corporate purposes[236] Results of Operations Net revenue for Q3 FY22 increased by $12.1 million (4.0%) year-over-year, driven by NE and SE segments, while gross margin slightly decreased to 59.2% due to unfavorable product mix, and a $6.4 million loss was recorded on convertible note settlement Net Revenue by Segment - Q3 FY22 vs Q3 FY21 (in millions) | Segment | Q3 FY22 | Q3 FY21 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | NE | $204.3 | $190.9 | $13.4 | 7.0% | | SE | $26.5 | $20.3 | $6.2 | 30.5% | | OSP | $84.7 | $92.2 | $(7.5) | (8.1)% | | Total | $315.5 | $303.4 | $12.1 | 4.0% | - Gross margin for Q3 FY22 was 59.2%, a decrease of 0.8 percentage points from 60.0% in the prior-year quarter, primarily due to unfavorable product mix and reduced manufacturing absorption in the OSP segment[202][229] - For the nine months ended April 2, 2022, SG&A expense increased by $22.0 million (8.9%) year-over-year, primarily due to targeted investments in people, processes, and technology[211] Liquidity and Capital Resources As of April 2, 2022, the company held $596.0 million in cash and equivalents, with $104.5 million cash from operations, while financing activities used $151.3 million for stock repurchases and convertible note settlements, partially offset by $400.0 million from new debt issuance - Cash and cash equivalents, short-term investments, and restricted cash totaled $596.0 million as of April 2, 2022, down from $703.7 million as of July 3, 2021[233] - Cash from operations for the nine months was $104.5 million, a decrease from $180.7 million in the prior year, mainly due to changes in operating assets and liabilities like increased inventory and accounts receivable[241] - Financing activities included issuing $400.0 million in new senior notes, repurchasing $207.0 million of common stock, and paying $324.3 million to settle convertible notes[243] Quantitative and Qualitative Disclosure About Market Risks The company states that there have been no material changes to its market risk, including foreign exchange and interest rate risks, from what was disclosed in its Annual Report on Form 10-K for the fiscal year ended July 3, 2021 - The Company's market risk profile concerning foreign exchange and interest rates has not materially changed since the last annual report[250] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of April 2, 2022, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of the end of the quarter[251] - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[252] PART II - OTHER INFORMATION Legal Proceedings The company is involved in various legal claims, including an ongoing pension-related lawsuit for a foreign subsidiary with an accrued liability of £7.0 million ($9.2 million) as of April 2, 2022, which management does not expect to materially impact its financial position - The company is appealing a court decision regarding a pension deed amendment for a foreign subsidiary and has an accrued pension liability of £7.0 million ($9.2 million) related to this matter as of April 2, 2022[138][139] Risk Factors This section outlines significant risks, including ongoing COVID-19 impacts on operations and supply chains, rapid technological changes, reliance on limited key customers, international operational risks, cybersecurity threats, and financial risks related to substantial indebtedness - The COVID-19 pandemic continues to pose risks, including disruptions to facilities and suppliers, shipping challenges, and inflationary cost pressures on manufacturing, logistics, and procurement[256][258] - The company faces risks from rapid technological change, particularly in the transition to 5G, and acknowledges that its growth forecasts for 3D sensing are subject to significant uncertainty[269][275][277] - Dependence on a limited number of customers, such as the exclusive reliance on SICPA for marketing and selling anti-counterfeiting pigments, creates pricing pressure and revenue concentration risk[278][279] - The company's outstanding debt, including multiple series of Senior Notes, increases leverage, may limit operational flexibility due to restrictive covenants, and poses risks to its ability to meet debt service requirements[312][314][316] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the period - None Defaults Upon Senior Securities There were no defaults upon senior securities during the period - None Mine Safety Disclosures No mine safety disclosures were reported for the period - None Other Information There was no other information to be disclosed for the period - None Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act and Inline XBRL data files - The report includes required CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) and Inline XBRL filings[337]