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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the transition period from to
Commission File Number 0-22874
JDS UNIPHASE CORPORATION (Exact name of Registrant as specified in its charter)
430 North McCarthy Boulevard, Milpitas, California 95035 (Address of principal executive offices including Zip code)
(408) 546-5000 (Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of April 28, 2011, the Registrant had 231,518,972 shares of common stock outstanding, including 3,979,389 exchangeable shares of JDS Uniphase Canada Ltd. The par value of each share of common stock is $0.001. Each exchangeable share is exchangeable at any time into common stock on a one-for-one basis, entitles a holder to dividend and other rights economically equivalent to those of the common stock, and through a voting trust, votes at meetings of stockholders of the Registrant.
JDS UNIPHASE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share data) (unaudited)
See accompanying notes to consolidated financial statements.
JDS UNIPHASE CORPORATION (in millions, except share and par value data) (unaudited)
See accompanying notes to consolidated financial statements.
JDS UNIPHASE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (unaudited)
See accompanying notes to consolidated financial statements.
JDS UNIPHASE CORPORATION (Unaudited)
Note 1. Basis of Presentation
The financial information for the Company (or “JDSU”) as of March 31, 2012 and for the three and nine months ended March 31, 2012 and April 2, 2011 is unaudited, and includes all normal and recurring adjustments that management considers necessary for a fair statement of the financial information set forth herein, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 2, 2011.
The balance sheet as of July 2, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The results for the three and nine months ended March 31, 2012 and April 2, 2011 may not be indicative of results for the year ending June 30, 2012 or any future periods.
Fiscal Years
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to June 30th. The Company’s fiscal 2012 is a 52 week year ending on June 30, 2012. The Company’s fiscal 2011 was a 52 week year and ended on July 2, 2011.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with U.S. GAAP and include the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the reported amount of net revenue and expenses and the disclosure of commitments and contingencies during the reporting periods. The Company bases estimates on historical experience and on various assumptions about the future that are believed to be reasonable based on available information. The Company’s reported financial position or results of operations may be materially different under different conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information.
Note 2. Recently Issued Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This guidance will be effective for the Company beginning in the first quarter of fiscal 2014. The adoption of this guidance may expand existing disclosure requirements, which the Company is currently evaluating.
In September 2011, the FASB issued new accounting guidance that simplifies goodwill impairment tests. The new guidance states that a qualitative assessment may be performed to determine whether further impairment testing is necessary. This guidance will be effective for the Company beginning in the first quarter of fiscal 2013. However, the Company plans to early adopt the guidance in the fourth quarter of fiscal 2012 when the annual goodwill impairment testing is performed. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. The amended guidance eliminates one of the presentation options provided by current U.S. GAAP that is to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, it gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for the Company beginning in the first quarter of fiscal 2013, and will be applied retrospectively. The Company is currently evaluating the disclosure impact of the adoption of this guidance on its consolidated financial statements.
JDS UNIPHASE CORPORATION (Unaudited)
Note 3. Earnings Per Share
The following table sets forth the computation of basic and diluted net (loss) income per share (in millions, except per share data):
The following table sets forth the weighted-average potentially dilutive securities excluded from the computation of the diluted (loss) income per share because their effect would have been anti-dilutive (in millions):
The Company’s 1% Senior Convertible Notes are not included in the table above. The par amount of convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and then the “in-the-money” conversion benefit feature at the conversion price above $30.30 per share is payable in shares of the Company’s common stock or cash. See “Note 10. Debt and Letters of Credit” for more details.
Note 4. Accumulated Other Comprehensive Income
The Company’s accumulated other comprehensive income consists of the accumulated net unrealized gains and losses on available-for-sale investments, foreign currency translation adjustments and defined benefit obligation.
At March 31, 2012 and July 2, 2011, balances for the components of accumulated other comprehensive income were as follows (in millions):
JDS UNIPHASE CORPORATION (Unaudited)
The components of comprehensive income (loss), net of tax, were as follows (in millions):
Note 5. Mergers and Acquisitions
Dyaptive Systems Inc (“Dyaptive”)
In January 2012, the Company completed the acquisition of Dyaptive Systems Inc (“Dyaptive”) based in Vancouver, Canada. The Company acquired tangible and intangible assets and assumed liabilities of Dyaptive for a total purchase price of CAD 14.9 million (approximately USD 14.8 million) in cash, including a holdback payment of CAD 2.0 million (approximately USD 2.0 million), which is reserved for potential breach of representations and warranties, due on December 14, 2012.
Dyaptive is a provider of wireless laboratory test tools for base station and network load simulators. By acquiring Dyaptive, the Company expects to strengthen its laboratory product portfolio and to offer field service and production test tools that are complementary to its current products. Dyaptive is included in the Company’s Communications Test and Measurement (“CommTest”) segment.
The Company accounted for the transaction in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the acquisition date.
The purchase price was allocated as follows (in millions):
The following table summarizes the components of the tangible assets acquired and liabilities assumed at fair value (in millions):
JDS UNIPHASE CORPORATION (Unaudited)
The fair value of acquired developed technology and customer relationships was determined based on an income approach using the discounted cash flow method. The acquired developed technology and customer relationship intangible assets are being amortized over their estimated useful lives of four years. Acquired intangible assets are classified as Level 3 assets for which fair value is derived from valuation based on inputs that are unobservable and significant to the overall fair value measurement.
The goodwill arising from this acquisition is primarily attributed to sales of future products and services and the assembled workforce of Dyaptive. Goodwill is not being amortized but is reviewed annually for impairment, or more frequently if impairment indicators arise, in accordance with authoritative guidance. Goodwill has been assigned to the Communications Test and Measurement segment and is not deductible for tax purposes.
Dyaptive’s results of operations have been included in the Company’s consolidated financial statements subsequent to the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material to prior period financial statements.
QuantaSol Limited (“QuantaSol”)
In July 2011, the Company purchased critical product design, patented intellectual technology, and other assets from QuantaSol, a concentrated photovoltaic (“CPV”) provider, for a total cash purchase price consideration of $3.7 million. The purchased assets are included in the Company’s Communications and Commercial Optical Products (“CCOP”) segment.
The Company accounted for the transaction in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired were recorded at fair value on the acquisition date. The acquired intangible assets are classified as Level 3 assets for which fair value is derived from valuation based on inputs that are unobservable and significant to the overall fair value measurement.
The $3.7 million purchase price was allocated primarily to developed technology and is being amortized over an estimated useful life of four years.
Note 6. Balance Sheet and Other Details
Accounts Receivable Reserves and Allowances
The activities and balances for allowance for doubtful accounts and allowance for sales returns were as follows (in millions):
(1) Write-off of uncollectible accounts, net of recoveries.
Inventories, Net
Inventories, net are stated at the lower of cost or market, and include material, labor, and manufacturing overhead costs. The components of inventories, net were as follows (in millions):
JDS UNIPHASE CORPORATION (Unaudited)
Property, Plant and Equipment, Net
The components of property, plant and equipment, net were as follows (in millions):
At March 31, 2012 and July 2, 2011, property, plant and equipment, net included $22.0 million and $17.3 million in land and buildings, respectively, related to the Santa Rosa and Eningen site sale and leaseback transactions accounted for under the financing method. See “Note 16. Commitments and Contingencies” for more details on both transactions.
During the three months ended March 31, 2012 and April 2, 2011, the Company recorded $17.9 million and $16.6 million of depreciation expense, respectively. During the nine months ended March 31, 2012 and April 2, 2011, the Company recorded $52.6 million and $47.5 million of depreciation expense, respectively.
Prepayments and Other Current Assets
The components of prepayments and other current assets were as follows (in millions):
Other Current Liabilities
The components of other current liabilities were as follows (in millions):
JDS UNIPHASE CORPORATION (Unaudited)
Other Non-Current Liabilities
The components of other non-current liabilities were as follows (in millions):
Note 7. Investments and Fair Value Measurements
The Company’s investments in marketable debt and equity securities were primarily classified as available-for-sale investments.
At March 31, 2012, the Company’s available-for-sale securities were as follows (in millions):
The Company generally classifies debt securities as cash equivalents, short-term investments, or long-term investments based on the stated maturities, however certain securities with stated maturities of longer than twelve months which are highly liquid and available to support current operations are classified as current assets. As of March 31, 2012, of the total estimated fair value, $32.9 million was classified as cash equivalents, $298.5 million was classified as short-term investments, and $1.3 million was classified as long-term investments.
In addition to the amounts presented above, at March 31, 2012, the Company’s short-term investments classified as trading securities, related to the deferred compensation plan, were $4.7 million, of which $0.9 million were invested in debt securities, $0.5 million were invested in money market instruments and funds and $3.3 million were invested in equity securities. Trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in Interest and other income (expense), net.
During the three and nine months ended March 31, 2012, the Company recorded other-than-temporary impairment charges of $0.3 million on an asset backed security. During the three and nine months ended April 2, 2011, the Company recorded other-than-temporary impairment charges of $0.2 million or asset backed securities.
JDS UNIPHASE CORPORATION (Unaudited)
At March 31, 2012, the Company’s total gross unrealized losses on available-for-sale securities, aggregated by type of investment instrument were as follows (in millions):
At March 31, 2012, contractual maturities of the Company’s debt securities classified as available-for-sale securities were as follows (in millions):
At July 2, 2011, the Company’s available-for-sale securities were as follows (in millions):
The Company generally classifies debt securities as cash equivalents, short-term investments, or long-term investments based on the stated maturities, however certain securities with stated maturities of longer than twelve months which are highly liquid and available to support current operations are classified as current assets. As of July 2, 2011, of the total estimated fair value, $23.7 million was classified as cash equivalents, $291.7 million was classified as short-term investments, and $2.9 million was classified as long-term investments.
In addition to the amounts presented above, at July 2, 2011, the Company’s short-term investments classified as trading securities, related to the deferred compensation plan, were $5.7 million, of which $0.9 million were invested in debt securities, $0.5 million were invested in money market instruments and funds and $4.3 million were invested in equity securities. Trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in interest and other income (expense), net.
At July 2, 2011, the Company’s gross unrealized losses on available-for-sale securities, aggregated by type of investment instrument were as follows (in millions):
JDS UNIPHASE CORPORATION (Unaudited)
Fair Value Measurements
Assets measured at fair value at March 31, 2012 are summarized below (in millions):
(1) $355.3 million in cash and cash equivalents, $303.2 million in short-term investments, $32.6 million in restricted cash, $6.6 million in long-term restricted cash included in other non-current assets, and $1.3 million in long-term investments on the Company’s consolidated balance sheet.
The Company measures its cash equivalents, marketable securities, and foreign currency forward contracts at fair value, which does not materially differ from the carrying values of these instruments in the financial statements.
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions about the factors that market participants would use in valuing the asset or liability.
The Company’s cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy based on quoted prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.
· Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets. Level 1 assets of the Company include money market funds and U.S. Treasury securities as they are traded in active markets with sufficient volume and frequency of transactions.
· Level 2 includes financial instruments for which the valuations are based on quoted prices for similar assets, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets. Level 2 instruments of the Company generally include certain U.S. and foreign Government and Agency securities, commercial paper, corporate and municipal bonds and notes, asset-backed securities, and foreign currency forward contracts. To estimate their fair value, the Company utilizes pricing models based on market data. The significant inputs for the valuation model usually include benchmark yields, reported trades, broker and dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, and industry and economic events.
JDS UNIPHASE CORPORATION (Unaudited)
As of July 2, 2011 and during the three and nine months ended March 31, 2012, the company held no Level 3 investments. Level 3 includes financial instruments for which fair value is derived from valuation based on inputs that are unobservable and significant to the overall fair value measurement.
Foreign Currency Forward Contracts
The Company has foreign subsidiaries that operate and sell the Company’s products in various markets around the world. As a result, the Company is exposed to foreign exchange risks. The Company utilizes foreign exchange forward contracts and other instruments to manage foreign currency risk associated with foreign currency denominated assets and liabilities, primarily certain short-term intercompany receivables and payables and to reduce the volatility of earnings and cash flows related to foreign-currency transactions.
The forward contracts, most with a term of less than 120 days, were transacted near month end; therefore, the fair value of the contracts as of both March 31, 2012 and July 2, 2011, is approximately zero. The change in the fair value of these foreign currency forward contracts is recorded as income or loss in the Company’s Consolidated Statements of Operations as a component of Interest and other income (expense), net. Such changes were not material during any periods presented.
Note 8. Goodwill
The Company’s goodwill balance as of March 31, 2012 was $69.1 million, which consisted of $60.8 million of goodwill in the Communications and Test Measurement segment and $8.3 million of goodwill in the Advanced Optical Technologies segment. The Company’s goodwill balance as of July 2, 2011 was $67.4 million, which consisted of $59.1 million of goodwill in the Communications and Test Measurement segment and $8.3 million of goodwill in the Advanced Optical Technologies segment. The goodwill balance is adjusted quarterly to record the effect of currency translation adjustments.
The Company reviews 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 fourth quarter of fiscal 2011, the Company completed the annual impairment test of goodwill, which indicated that there was no goodwill impairment. There were no events or changes in circumstances which triggered an impairment review during the three and nine months ended March 31, 2012 and April 2, 2011.
Note 9. Acquired Developed Technology and Other Intangibles
The following tables present details of the Company’s acquired developed technology and other intangibles (in millions):
During the three months ended March 31, 2012, the Company completed the $9.8 million in-process research and development (“IPR&D”) project related to the Network Solutions Division (“NSD”) business acquisition of fiscal 2010 and transferred it from indefinite life intangible assets to acquired developed technology and began amortizing the developed technology intangible asset over its useful life of five years.
JDS UNIPHASE CORPORATION (Unaudited)
During the three and nine months ended March 31, 2012, the Company recorded $21.6 million and $65.4 million, respectively, of amortization expense relating to acquired technology and other intangibles. During the three and nine months ended April 2, 2011, the Company recorded $22.3 million and $67.1 million, respectively, of amortization expense relating to acquired technology and other intangibles.
Based on the carrying amount of acquired technology and other intangibles as of March 31, 2012, and assuming no future impairment of the underlying assets, the estimated future amortization is as follows (in millions):
The acquired developed technology and other intangibles balance are adjusted quarterly to record the effect of currency translation adjustments.
Note 10. Debts and Letters of Credit
The following table presents details of the Company’s long-term debt (in millions):
The Company was in compliance with all debt covenants as of March 31, 2012.
1% Senior Convertible Notes
On June 5, 2006, the Company completed an offering of $425.0 million aggregate principal amount of 1% Senior Convertible Notes due 2026. Proceeds from the notes amounted to $415.9 million after issuance costs. The notes bear interest at a rate of 1.0% per year and are convertible into a combination of cash and shares of the Company’s common stock at a conversion price of $30.30 per share. Interest on the notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2006. The notes mature on May 15, 2026.
The holders of the notes may require the Company to purchase all or a portion of the notes on each of May 15, 2013, May 15, 2016 and May 15, 2021 at a price equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date. In addition, upon certain fundamental changes, holders may require the Company to purchase for cash the notes at a price equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date. The Company may not redeem the notes before May 20, 2013. On or after that date, the Company may redeem all or part of the notes for cash at 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Effective the first quarter of fiscal 2010, the Company adopted new authoritative guidance which applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. The Company calculated the carrying value of the liability component at issuance as the present value of its cash flows using a discount rate of 8.1%, based on the 7-year swap rate plus credit spread as of the issuance date. The credit spread for JDSU is based on the historical average “yield to worst” rate for BB-rated issuers. The carrying value of the liability component was determined to be $266.5 million. The equity component, or debt discount, of the notes was determined to be $158.5 million. The debt discount is being amortized using the effective interest rate of
JDS UNIPHASE CORPORATION (Unaudited)
8.1% over the period from issuance date through May 15, 2013 as a non-cash charge to interest expense. As of March 31, 2012, the remaining term of the 1% Senior Convertible Notes is 1.1 years.
The $9.1 million of costs incurred in connection with the issuance of the notes were capitalized and bifurcated into debt issuance cost of $5.7 million and equity issuance cost of $3.4 million. The debt issuance cost is being amortized to interest expense using the effective interest method from issuance date through May 15, 2013. As of March 31, 2012, the unamortized portion of the debt issuance cost related to the notes was $0.9 million and was included in Other current assets and Other non-current assets on the Consolidated Balance Sheets.
The following table presents the carrying amounts of the liability and equity components (in millions):
Based on quoted market prices, as of March 31, 2012 and July 2, 2011, the fair market value of the 1% Senior Convertible Notes was approximately $326.2 million and $332.1 million, respectively. Changes in fair market value reflect the change in the market price of the notes. The 1% Senior Convertible Notes are classified within level 2 as they are not actively traded in markets; and the bond parity derivatives related to the convertible notes are classified within level 1 since the quoted market price for identical instrument are available in active markets. The fair value of the bond parity derivatives is approximately zero as of March 31, 2012.
The following table presents the effective interest rate and the interest expense for the contractual interest and the amortization of debt discount (in millions, except for the effective interest rate):
Revolving Credit Facility
On January 20, 2012, the Company entered into an agreement (the “Credit Agreement”) for a five-year $250.0 million revolving credit facility that matures in January 2017. At the Company’s option, the principal amount available under the facility may be increased by up to an additional $100 million. Borrowings under the credit facility bear an annual interest rate, at the Company’s option, equal to either (i) the Alternate Base Rate (as defined in the Credit Agreement) plus the applicable margin for base rate loans, which ranges between 0.75% and 2.00%, based on the Company’s leverage ratio or (ii) the Adjusted LIBO Rate (as defined in the Credit Agreement) plus the applicable margin for Eurocurrency loans, which ranges between 1.75% and 3.00%, based on the Company’s leverage ratio. The Company is required to pay a commitment fee on the unutilized portion of the facility of between 0.25% and 0.50%, based on the Company’s leverage ratio.
Obligations under the Credit Agreement are guaranteed by certain wholly owned domestic subsidiaries of the Company (“the Guarantors”). The Company’s obligations under the Credit Agreement have been secured by a pledge of substantially all assets of the Company and the Guarantors (subject to certain exclusions), full pledges of equity interests in certain domestic subsidiaries and partial pledges of equity interests in certain foreign subsidiaries. The Company has also agreed to maintain at least $200 million of cash and permitted investments in accounts which are subject to a control agreement.
The Credit Agreement contains certain affirmative and negative covenants applicable to the Company and its subsidiaries, which include, among other things, restrictions on their ability to (1) incur additional indebtedness, (ii) make certain investments, (iii) acquire other entities, (iv) dispose of assets, (v) incur liens and (vi) make certain payments including those related to dividends or repurchase of equity. The Credit Agreement also contains financial maintenance covenants, including a maximum senior secured leverage ratio, a maximum total leverage ratio, a minimum interest coverage ratio and the requirement to maintain minimum liquidity.
JDS UNIPHASE CORPORATION (Unaudited)
The $1.9 million of costs incurred in connection with the issuance of the revolving credit facility were capitalized and are being amortized to interest expense on a straight-line basis over five years based on the contractual term of the revolving credit facility. As of March 31, 2012, the unamortized portion of debt issuance cost related to the revolving credit facility was $1.8 million, and was included in Other current assets and Other non-current assets on the Consolidated Balance Sheets.
During the quarter ended March 31, 2012, there was no drawdown under the facility and the outstanding balance at quarter end is zero.
Outstanding Letters of Credit
As of March 31, 2012, the Company had 16 standby letters of credit totaling $36.5 million.
Note 11. Restructuring and Related Charges
The Company continues to take advantage of opportunities to further reduce costs through targeted restructuring events intended to consolidate its operations and rationalize the manufacturing of its products based on core competencies and cost efficiencies, together with the need to align the business in response to the market conditions. As of March 31, 2012, the Company’s total restructuring accrual was $9.7 million. During the three and nine months ended March 31, 2012, the Company incurred restructuring expenses of $2.0 million and $7.5 million, respectively. During the three and nine months ended April 2, 2011, the Company incurred restructuring expenses of $7.6 million and $10.4 million, respectively. The Company’s restructuring charges can include severance and benefit costs to eliminate a specified number of positions, facilities and equipment costs to vacate facilities and consolidate operations, and lease termination costs. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over multiple periods.
JDS UNIPHASE CORPORATION (Unaudited)
Summary of Restructuring Plans
The adjustments to the accrued restructuring expenses related to all of the Company’s restructuring plans described below for the nine months ended March 31, 2012 were as follows:
As of March 31, 2012 and July 2, 2011, the Company included the long-term portion of the restructuring liability of $4.9 million and $4.4 million, respectively, as “restructuring accrual”, a component under other non-current liabilities, and the short-term portion as “restructuring accrual”, a component under other current liabilities in the Consolidated Balance Sheets.
The Company had also previously recorded lease exit charges, net of assumed sub-lease income in prior fiscal years related to the Ottawa facility that was included in selling, general and administrative expenses. The fair value of the remaining contractual obligations, net of sublease income is $4.9 million and $5.9 million as of March 31, 2012 and July 2, 2011 respectively. The Company included the long-term portion of the contract obligations of $4.0 million and $5.0 million in other non-current liabilities as of each period end, and the short-term portion in other current liabilities in the Consolidated Balance Sheets. The payments related to these lease costs are expected to be paid by the end of the third quarter of fiscal 2018.
CommTest Manufacturing Support Consolidation Plan
During the third quarter of fiscal 2012, management approved a plan to continue to consolidate its manufacturing support operations in the CommTest segment, by reducing the number of contract manufacturer locations worldwide and moving most of them to lower cost regions such as Mexico and China. This action will occur over the next several quarters and affected 89 employees in manufacturing, research and development and selling, general and administrative functions. The employees being affected are located in North America, Europe and Asia. As a result, a restructuring charge of $2.7 million was recorded towards severance and employee benefits. As of March 31, 2012, none of these employees have been terminated. Payments related to severance and benefits accrual are expected to be paid by the end of the second quarter of fiscal 2013.
JDS UNIPHASE CORPORATION (Unaudited)
CommTest Solutions Business Restructuring Plan
During the second quarter of fiscal 2012, management approved a plan to re-organize the Customer Experience Management business of the CommTest segment to improve business efficiencies with greater focus on the mobility and video software test business, and to re-organize CommTest’s global operations to reduce costs by moving towards an outsourcing model. Approximately 59 employees in manufacturing, research and development and selling, general and administrative functions were affected by the plan. As of March 31, 2012, 31 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 fourth quarter of fiscal 2012.
CommTest Germantown Restructuring Plan
During the second quarter of fiscal 2012, management approved a plan to consolidate workspace in Germantown, Maryland, primarily used by the CommTest segment. As of December 31, 2011, the Company exited the workspace in Germantown under the plan. The fair value of the remaining contractual obligations, net of sublease income as of March 31, 2012 was $0.6 million. Payments related to the lease costs are expected to be paid by the end of the second quarter of fiscal 2019.
CCOP Fiscal Q1 2012 Plan
During the first quarter of fiscal 2012, management approved a plan to restructure certain CCOP segment functions and responsibilities to drive efficiency and segment profitability in light of current economic conditions. 40 employees in research and development and selling, general and administrative functions were affected by the plan. As of December 31, 2011, all the employees under the plan have been terminated. The employees affected were located in North America and Asia. Payments related to severance and benefits were paid by October 2011.
CommTest Sales Rebalancing Restructuring Plan
During the fourth quarter of fiscal 2011, management approved a plan to re-organize the sales organization and one of the product portfolios in the CommTest segment to focus efforts on higher growth technologies and regions. This re-organization was designed to improve the effectiveness of the segment’s sales organization and re-align the research and development projects towards the overall growth strategy of the segment. Approximately 89 employees in manufacturing, research and development and selling, general and administrative functions were affected by the plan. As of March 31, 2012, 87 employees have been terminated. The employees being affected are located in North America, Latin America, Europe and Asia. During the three and nine months ended March 31, 2012, the Company adjusted down the accrual for $0.1 million and $0.7 million, respectively, due to management’s decision to re-locate employees and realize co-location efficiencies. Payments related to remaining severance and benefits accrual are expected to be paid by the end of the fourth quarter of fiscal 2012.
CommTest Market Rebalancing Restructuring Plan
During the third quarter of fiscal 2011, management approved a plan for the CommTest segment to focus on higher growth products and services in lower cost markets with higher growth potential. This resulted in termination of employment, exit of three facilities and manufacturing transfer costs. Approximately 128 employees in manufacturing, research and development and selling, general and administrative functions were affected by the plan. As of March 31, 2012, 127 employees have been terminated. The employees being affected are located in North America, Europe and Asia. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the fourth quarter of fiscal 2012. The fair value of the remaining contractual obligations, net of sublease income as of March 31, 2012 was $1.1 million. Payments related to the lease costs are expected to be paid by the end of the second quarter of fiscal 2016.
CommTest US Manufacturing Outsourcing Restructuring Plan
During fiscal 2010, the Company exited facilities in the states of Maryland and Indiana as part of its restructuring plan in the CommTest segment to reduce and/or consolidate manufacturing locations. The fair value of the remaining contractual obligations, net of sublease income as of March 31, 2012 was $1.1 million. Payments related to the lease costs are expected to be paid by the end of the second quarter of fiscal 2015 for its facilities in the state of Indiana. Payments related the lease costs for its facilities in the state of Maryland were paid out as of December 31, 2011.
JDS UNIPHASE CORPORATION (Unaudited)
CommTest Germany Restructuring Plan
During the fourth quarter of fiscal 2009, the Company implemented a restructuring plan for its site in Germany in its CommTest segment to significantly change the overall cost structure and complexity of the site, and to align the cost of the site more with market demand. 77 employees in manufacturing, research and development and selling, general and administrative functions were affected by the plan. As of March 31, 2012, 60 employees have been terminated. Payments related to severance and benefits accrual are expected to be paid by the end of the fourth quarter of fiscal 2016.
Other plans
Other plans account for a minor portion of total restructuring accrual, with minimal or no revisions recorded.
Note 12. Income Tax
The Company recorded an income tax expense of $3.1 million and $9.5 million for the three and nine months ended March 31, 2012, respectively. The Company recorded an income tax benefit of $32.1 million and $29.0 million for the three and nine months ended April 2, 2011, respectively.
The income tax expense recorded for the three and nine months ended March 31, 2012, primarily relates to income tax in certain foreign and state jurisdictions based on the Company’s forecasted pre-tax income for the year in those locations.
The income tax benefit recorded for the three months and nine months ended April 2, 2011, primarily relates to a $34.9 million release of the deferred tax valuation allowance for a non-US jurisdiction. The tax benefit was offset by income tax expense in certain foreign and state jurisdictions based on the Company’s forecasted pre-tax income for the year in those locations. In addition, the income tax benefit for the nine months ended April 2, 2011, includes the recognition of $5.2 million of uncertain tax benefits relating to the effective settlement of tax matters in non-US jurisdictions.
The income tax expense recorded differs from the expected tax expense or benefit that would be calculated by applying the federal statutory rate to the Company’s income or loss before income taxes primarily due to the increases in valuation allowance for deferred tax assets attributable to the Company’s domestic and foreign losses from continuing operations.
As of March 31, 2012 and July 2, 2011, the Company’s unrecognized tax benefits totaled $60.7 million and $64.0 million, respectively, and are included in deferred taxes and other non-current tax liabilities, net. The Company had $23.3 million accrued for the payment of interest and penalties at March 31, 2012.
Note 13. Stock-Based Compensation
Overview
The impact on the Company’s results of operations of recording stock-based compensation by function for the three and nine months ended March 31, 2012 and April 2, 2011 was as follows (in millions):
Approximately $2.3 million of stock-based compensation was capitalized in inventory at March 31, 2012.
Stock Options
The Company issues stock options that generally become exercisable over a three-year or four-year period and, if not exercised, expire from five to ten years after the date of grant.
JDS UNIPHASE CORPORATION (Unaudited)
As of March 31, 2012, $7.7 million of unrecognized stock-based compensation cost related to stock options remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 1.3 years.
Employee Stock Purchase Plan
The Company’s employee stock purchase plan (“ESPP”) provides eligible employees with the opportunity to acquire an ownership interest in the Company at a discounted purchase price with a 6 month look-back period.
As of March 31, 2012, $1.0 million of unrecognized stock-based compensation cost related to the ESPP remains to be amortized. That cost is expected to be recognized through the first quarter of fiscal 2013.
Full Value Awards
“Full Value Awards” refer to Restricted Stock Units (“RSUs”) and Performance Units that are granted with the exercise price equal to zero and are converted to shares immediately upon vesting. These Full Value Awards are performance based, time based, or a combination of both and expected to vest over one year to four years. The fair value of the time based Full Value Awards is based on the closing market price of the Company’s common stock on the date of award.
For the nine months ended March 31, 2012, the Company granted 4.7 million RSUs, of which 4.1 million was granted in the first quarter of fiscal 2012. Of the 4.1 million RSUs granted in the first quarter of fiscal 2012, 0.5 million are RSUs with market conditions (“MSUs”) and represent the target amount of grants. The actual number of shares awarded upon vesting of the MSUs may be higher or lower depending upon the achievement of the relevant market conditions. The majority of MSUs vest in equal annual installments over three years based on the attainment of certain total shareholder return performance measures and the employee’s continued service through the vest date. The aggregate grant-date fair value of MSUs was estimated to be $9.0 million and was calculated using a Monte Carlo simulation. The remaining shares are mainly time based RSUs. The majority of these time based RSUs vest over three years, with 33% vesting after one year and quarterly over the remaining two years.
As of March 31, 2012, $62.3 million of unrecognized stock-based compensation cost related to Full Value Awards remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 2.2 years.
Valuation Assumptions
The Company estimates the fair value of stock options with service conditions and ESPP using a Black-Scholes-Merton (BSM) valuation model. The fair value is estimated on the date of grant using the BSM option valuation model with the following weighted-average assumptions:
(1) There were no stock options granted during the nine months ended March 31, 2012.
The fair value of stock options with market conditions are estimated on the dates of grant using the Lattice valuation model.
Note 14. Employee Defined Benefit Plans
The Company sponsors qualified and non-qualified pension plans for certain past and present employees in the U.K. and Germany. The Company is also responsible for the non-pension postretirement benefit obligation of a previously acquired subsidiary. Most of the plans have been closed to new participants and no additional service costs are being accrued, except for the plans assumed during fiscal 2010 in connection with an acquisition. Benefits are generally based upon years of service and compensation or stated amounts for each year of service. As of March 31, 2012 the U.K. plan was partially funded while the other plans were unfunded. The Company’s policy for funded plans is to make contributions equal to or greater than the requirements prescribed by law or regulation.
JDS UNIPHASE CORPORATION (Unaudited)
For unfunded plans, the Company pays the postretirement benefits when due. Future estimated benefit payments are summarized below. No other required contributions to defined benefit plans are expected in fiscal 2012, but the Company, at its discretion, can make contributions to one or more of the defined benefit plans. The funded plan assets consist primarily of managed investments.
The following table presents the components of the net periodic cost for the pension plans (in millions):
Pension Benefits
Both the calculation of the projected benefit obligation and net periodic cost are based upon actuarial valuations. These valuations use participant-specific information such as salary, age, years of service, and assumptions about interest rates, compensation increases and other factors. At a minimum, the Company evaluates these assumptions annually and makes changes as necessary.
The Company expects to incur cash outlays of approximately $5.7 million related to its defined benefit pension plans during fiscal 2012 to make current benefit payments and fund future obligations. As of March 31, 2012, approximately $3.6 million had been incurred. These payments have been estimated based on the same assumptions used to measure the Company’s projected benefit obligation at July 2, 2011.
Note 15. Related Party Transactions
KLA-Tencor Corporation (“KLA-Tencor”)
As of March 31, 2012, one member of the Board of Directors of JDSU was also a member of the Board of Directors of KLA-Tencor, a publicly held company which provides process control and yield management solutions for semiconductor manufacturing. KLA-Tencor is a customer of the Company.
Transactions and balances with the Company’s related parties were as follows (in millions):
Note 16. Commitments and Contingencies
Tax Matters
The Company has been subject to Texas franchise tax audits related to allocated taxable surplus capital for Texas report years 2001 through 2006. While the Company believes that it is reasonably possible this audit may result in additional tax liabilities, based on currently available information, the Company believes the ultimate outcome of this audit will not have a material adverse effect on the Company’s financial position, cash flows or overall trends in results of operations. There is the possibility of a material adverse effect on the Company’s financial position, cash flows or overall trends in results of operations for the period in which this matter is ultimately resolved, if it is resolved unfavorably, or in the period in which an unfavorable outcome becomes probable. The range of the potential total tax liability related to these matters is estimated to be from $0 million to $34.2 million, plus interest and penalties.
JDS UNIPHASE CORPORATION (Unaudited)
Legal Proceedings
During the first quarter of fiscal 2012, the Company received an unfavorable arbitrator’s decision in a legal dispute unrelated to current or future quarters. The arbitrator’s decision was related to, and contrary to the result of, an action which commenced in 2006 in the Western District of Pennsylvania in which the Company was a nominal plaintiff. The Pennsylvania matter was resolved in the Company’s favor in 2009 and was subsequently affirmed by a Federal Appeals Court in January 2011. The arbitration award was confirmed at the California State Superior Court in October, 2011. On March 5, 2012 the Pennsylvania District Court denied JDSU’s request to vacate the arbitration award, and the parties subsequently reached a settlement agreement on March 22, 2012 pursuant to which the Company paid $7.9 million on April 2, 2012 in full and final settlement of the matter. As of December 31, 2012, the Company had accrued $7.6 million, which included the arbitration award plus interest, in accordance with authoritative guidance on contingencies. An additional $0.3 million towards interest and attorney fees were recorded based on the settlement agreement during the quarter ended March 31, 2012. The accrual for the three months and nine months ended March 31, 2012 is included as a component of Selling, general and administrative expense and included as a component of Accrued expenses in the Company’s Consolidated Statement of Operations and Consolidated Balance Sheets, respectively.
The Company is subject to a variety of claims and suits that arise from time to time in the ordinary course of our business. While management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on its financial position, results of operations or statement of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable.
Guarantees
In accordance with authoritative guidance which requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities, are required.
The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its balance sheet as of March 31, 2012 and July 2, 2011.
Product Warranties
In general, the Company offers a three-month to one-year warranty for most of its products. The Company provides reserves for the estimated costs of product warranties at the time revenue is recognized. The Company estimates the costs of its warranty obligations based on its historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise with specific products. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
JDS UNIPHASE CORPORATION (Unaudited)
The following table presents the changes in the Company’s warranty reserve (in millions):
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