II-VI Incorporated Form 10-Q Summary
Filing-period note: The supplied filing is for II-VI Incorporated, not Coherent Corp., and covers the quarter and nine months ended March 31, 2014. The request metadata identifies “Coherent Corp.” and “2013 Q3,” which does not match the filing text.
Business context and reporting period
II-VI is a vertically integrated manufacturer of engineered materials, optical components, semiconductor lasers, optical amplifiers, thermoelectric products and related technologies serving industrial, optical communications, military, semiconductor, medical, consumer and government markets.
The filing presents unaudited results for the three and nine months ended March 31, 2014, compared with the corresponding 2013 periods. The company added the Active Optical Products segment following its acquisitions of Oclaro’s Switzerland-based semiconductor laser business and fiber amplifier and micro-optics business.
Key financial metrics
| Metric | Three months ended Mar. 31, 2014 | Three months ended Mar. 31, 2013 | Nine months ended Mar. 31, 2014 | Nine months ended Mar. 31, 2013 |
|---|---|---|---|---|
| Revenue | $173.6 million | $143.9 million | $495.3 million | $397.0 million |
| Gross margin | 31.5% | 35.4% | 33.2% | 37.4% |
| Earnings from continuing operations | $8.5 million | $16.3 million | $25.7 million | $44.3 million |
| Net earnings attributable to II-VI | $8.5 million | $15.9 million | $25.8 million | $40.8 million |
| Diluted EPS from continuing operations | $0.13 | $0.25 | $0.40 | $0.68 |
| Bookings | $187.5 million | $138.6 million | $498.0 million | $375.9 million |
Revenue increased 20.6% in the quarter and 24.8% year to date, primarily from the Oclaro acquisitions and prior acquisitions. Bookings increased 35.3% in the quarter and 32.5% year to date.
Gross margin declined because of restructuring charges, acquisition-related purchase-accounting inventory adjustments and weaker operating performance at the acquired businesses. Internal research and development increased to $12.1 million in the quarter and $31.2 million year to date, while selling, general and administrative expense increased to $33.8 million and $101.4 million, respectively.
The year-to-date effective tax rate from continuing operations was 18.5%, compared with 23.8% in the prior-year period. The current quarter included approximately $1.4 million of tax benefits from statute-of-limitations expirations and research and development tax credits.
Cash flow, liquidity and debt
| Metric | Mar. 31, 2014 | June 30, 2013 |
|---|---|---|
| Cash and cash equivalents | $185.7 million | $185.4 million |
| Total debt | $262.9 million | $114.0 million |
| Available borrowing capacity | $55.4 million | $29.8 million |
| Total assets | $1.090 billion | $863.8 million |
| Shareholders’ equity | $665.2 million | $636.1 million |
- Year-to-date operating cash flow was $68.6 million, compared with $68.1 million in the prior-year period.
- Investing cash outflow was $198.2 million, including $177.7 million for acquisitions and $20.8 million for capital expenditures.
- Financing cash inflow was $129.3 million, including $183.0 million of borrowings and $34.0 million of repayments.
- The company amended its credit facility in September 2013, increasing revolving capacity to $225 million and adding a $100 million term loan. The facility matures in September 2018.
- The company was in compliance with its debt covenants at March 31, 2014. Borrowings had a weighted-average interest rate of 1.7% for the nine months.
- Management stated that operating cash flow, cash reserves and available borrowing capacity should fund working capital, capital expenditures, share repurchases and growth objectives for the next twelve months.
Material changes versus the prior comparable period
- Oclaro acquisitions added the Active Optical Products segment, which generated $37.5 million of quarterly revenue and a $8.0 million segment loss; year-to-date revenue was $75.7 million and segment loss was $18.9 million.
- Acquisition-related costs, restructuring charges and purchase-accounting inventory adjustments reduced profitability. Management cited approximately $2.3 million of after-tax restructuring charges in the quarter, $3.9 million of transaction expenses and $4.1 million of inventory fair-value adjustments year to date.
- Interest expense increased by $1.0 million in the quarter and $2.4 million year to date because of acquisition financing.
- The tellurium product line was discontinued in December 2013. Prior periods were recast; the discontinued operation generated no revenue in the current quarter and $1.8 million of revenue and $0.1 million of earnings year to date.
- Inventories increased to $174.6 million from $141.9 million, goodwill increased to $198.9 million from $123.4 million, and other intangible assets increased to $141.3 million from $86.7 million.
- The company authorized a $20 million share-repurchase program and had repurchased 750,000 shares for approximately $12.0 million by March 31, 2014.
Segment and operating commentary
- Infrared Optics: Quarterly revenue declined 5% to $50.3 million and segment earnings declined 29% to $10.0 million, partly because of shipment delays following a HIGHYAG facility relocation.
- Near-Infrared Optics: Quarterly revenue declined 6% to $33.6 million and segment earnings declined 43% to $2.1 million, primarily because of price erosion on legacy optical communications products.
- Military & Materials: Quarterly revenue declined 20% to $22.2 million, but the segment moved from a $0.4 million loss to $1.4 million of earnings, supported by improved profitability at PRM and LightWorks-related revenue.
- Advanced Products Group: Quarterly revenue increased 9% to $30.0 million and segment earnings increased to $3.2 million from $0.9 million, driven by M Cubed, silicon carbide wafer demand and improved product mix.
- Active Optical Products: The acquired businesses remained loss-making while management implemented cost reductions and pursued planned synergies.
Outlook, risks, contingencies and unusual items
The filing does not provide formal numerical revenue or earnings guidance. Management expects cost-saving actions and synergies to improve the acquired Active Optical Products businesses, but cautions that actual results may differ materially because of economic and industry conditions, customer purchasing patterns, technology changes, competition, product acceptance and the ability to integrate acquisitions.
- Foreign currency exposure is concentrated partly in the Japanese yen. A 10% yen-to-dollar change would have affected quarterly revenue by approximately negative $0.9 million to positive $1.0 million.
- A 1% change in interest rates on borrowings would have changed interest expense by approximately $0.7 million for the quarter and $1.6 million year to date.
- Outstanding contractual obligations totaled $375.6 million, including $262.9 million of debt, $54.7 million of operating leases, $22.4 million of purchase obligations and $11.9 million of capital lease obligations.
- The company recorded an $8.9 million unfunded pension liability assumed with Laser Enterprise and expected to contribute approximately $0.5 million more to the Swiss pension plan during the remainder of fiscal 2014.
- A remaining LightWorks contingent earnout liability of $0.8 million was recorded at March 31, 2014. The company also had $10.0 million of acquisition-related holdback obligations.
- Goodwill and acquired intangible asset valuations remained subject to preliminary purchase-price allocations and impairment risk.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2014, with no material changes to internal control over financial reporting.
Investor verification checklist
- Verify the issuer and period: the filing is for II-VI Incorporated for the quarter ended March 31, 2014, not Coherent Corp. or a 2013 quarter.
- Assess whether Active Optical Products can achieve the planned cost savings and reverse its $18.9 million year-to-date segment loss.
- Reconcile revenue growth and bookings growth with declining gross margins and lower earnings per share.
- Review acquisition accounting, goodwill, intangible assets, inventory adjustments and potential impairment exposure.
- Evaluate leverage, debt maturities, variable-rate exposure and the $55.4 million of remaining borrowing capacity.
- Monitor optical communications price erosion, defense funding constraints, HIGHYAG shipment delays and foreign currency exposure.
- Confirm the treatment and continuing financial effects of the discontinued tellurium product line and related prior-period restatements.