COHERENT CORP. quarterly report, Q3 FY2013

II-VI Incorporated Form 10-Q Summary

Filing and period: Quarterly report filed May 9, 2013, for the three and nine months ended March 31, 2013. The source filing identifies the registrant as II-VI Incorporated, not Coherent Corp.; investors should verify the company identity and ticker. The filing is unaudited and covers fiscal 2013 year-to-date results.

Business Context

II-VI is a vertically integrated manufacturer of engineered materials and optoelectronic components serving industrial, military and aerospace, optical communications, high-power electronics, medical, semiconductor, photovoltaic and consumer markets. Reportable segments are Infrared Optics, Near-Infrared Optics, Military & Materials, and Advanced Products Group.

During fiscal 2013, the company acquired M Cubed Technologies, the Oclaro thin-film filter business and interleaver product line, and LightWorks Optics. The segment presentation was also revised to include VLOC in Military & Materials rather than Near-Infrared Optics.

Financial Performance

Metric	Q3 FY2013	Q3 FY2012	9M FY2013	9M FY2012
Revenue	$145.2 million	$132.6 million	$403.4 million	$397.7 million
Gross margin	35.1%	34.7%	36.4%	36.3%
Earnings before taxes	$19.0 million	$19.2 million	$55.5 million	$59.5 million
Net earnings	$16.1 million	$14.3 million	$41.7 million	$46.5 million
Net earnings attributable to II-VI	$15.9 million	$14.0 million	$40.8 million	$45.9 million
Diluted EPS	$0.25	$0.22	$0.64	$0.71
Bookings	$140.3 million	$145.8 million	$381.9 million	$392.9 million

Q3 revenue increased 9%, but excluding approximately $22 million from acquisitions, organic revenue declined approximately 7%.
Nine-month revenue increased 1%, but excluding approximately $30 million from acquisitions, organic revenue declined approximately 6%.
Q3 net earnings attributable to II-VI rose 13%; management primarily attributed the increase to a $1.3 million tax benefit from extension of the U.S. research and development tax credit and other interim tax adjustments.
Nine-month attributable earnings declined 11%, primarily because of higher selling, general and administrative expenses from acquired subsidiaries and $1.3 million of acquisition transaction costs.
Q3 and nine-month gross margins were broadly stable. Higher raw-material costs and lower-margin acquired businesses offset efficiency improvements in the Near-Infrared Optics operations.

Segment and Operating Trends

Infrared Optics: Q3 revenue rose 4% to $52.9 million, while nine-month revenue rose 1% to $149.9 million. Bookings declined 13% in Q3 and 7% year to date, reflecting weaker Japanese demand for high-power CO₂ laser systems and softer HIGHYAG demand.
Near-Infrared Optics: Q3 revenue declined 2% to $35.8 million; nine-month revenue rose 13% to $113.5 million, aided by the Oclaro acquisition and post-Thailand-flood operating efficiencies. Q3 bookings declined 32%, primarily because of weaker Chinese telecommunications demand and the shift from 40G to 100G components.
Military & Materials: Q3 revenue declined 4% to $28.9 million; nine-month revenue declined 19% to $74.2 million. The segment reported a nine-month loss of $3.8 million versus earnings of $0.1 million in the prior year, driven mainly by lower demand and pricing for selenium and tellurium at PRM.
Advanced Products Group: Q3 revenue increased 81% to $27.6 million and bookings increased 197% to $34.2 million, largely due to M Cubed and a Marlow personal-comfort order. Nine-month segment earnings fell to $0.3 million from $8.0 million because of lower Marlow and WBG revenue and unfavorable product mix.

Cash Flow, Liquidity and Capital Structure

Nine-month operating cash flow was $68.1 million, compared with $57.7 million in the prior-year period.
Investing cash use was $139.8 million, including $126.2 million for acquisitions and $17.5 million of capital expenditures.
Financing cash inflow was $92.6 million, including $109.0 million of net long-term borrowings and $20.0 million of treasury-stock purchases.
Cash and cash equivalents totaled $155.6 million at March 31, 2013, up from $134.9 million at June 30, 2012. Approximately $126 million was held outside the United States.
Total debt increased to $121.2 million from $12.8 million, principally to finance acquisitions. Available borrowing capacity was $23.5 million, down from $42.3 million.
The company had a $140 million unsecured revolving credit facility, expandable by an additional $35 million under specified conditions, expiring in November 2017. Borrowings carried a 1.5% rate at March 31, 2013. The company reported compliance with all debt covenants.
Management stated that operating cash flow, cash reserves and available borrowing capacity should fund working capital, capital expenditures and growth objectives for the next twelve months.
The company completed a $25 million share-repurchase program, purchasing 1.44 million shares in total, including 1.14 million shares during the nine months ended March 31, 2013.

Material Changes, Outlook and Risks

Management described worldwide customer demand as cautious. Key pressure points were Japanese laser markets, Chinese telecommunications spending, and low selenium and tellurium demand and pricing.
Bookings declined 4% in Q3 and 3% year to date; excluding current-year acquisitions, management estimated declines of 19% and 10%, respectively.
Acquisition accounting remained preliminary, including valuations of certain tangible and intangible assets and the LightWorks earnout. The acquisitions contributed approximately $30 million of nine-month revenue, but their earnings contribution was described as insignificant.
LightWorks included a potential cash earnout of up to $4.2 million, with a preliminary fair value liability of $3.4 million at March 31, 2013. Payment, if earned, would be due in March 2014.
Goodwill increased to $122.3 million from $80.7 million and other intangible assets increased to $88.6 million from $44.0 million, primarily because of acquisitions. Impairment testing depends on forecasts, market conditions, pricing, costs and discount-rate assumptions.
Other exposures include foreign currency, variable interest rates, commodity prices for tellurium and selenium, customer concentration, inventory obsolescence, warranty claims, tax audits and integration of acquisitions.
A 10% decrease in tellurium and selenium index prices could have caused an additional inventory write-down of approximately $1.4 million, or $0.02 per diluted share, at March 31, 2013.
The filing provides no quantitative full-year revenue or earnings guidance. Management’s liquidity statement is the principal forward-looking outlook disclosed.

Important Facts to Verify

Confirm that this filing relates to II-VI Incorporated rather than Coherent Corp., as indicated in the request metadata.
Assess whether reported revenue growth is acquisition-driven and whether organic bookings and demand are stabilizing.
Monitor debt repayment, covenant headroom and remaining borrowing availability following the acquisition financing.
Evaluate the sustainability of margins amid raw-material inflation, lower commodity prices and the lower-margin profile of acquired businesses.
Review goodwill and intangible-asset valuations, including the unresolved preliminary purchase-price allocations.
Track the LightWorks earnout, acquisition integration costs and any further contingent consideration.
Review the company’s most recent Form 10-K for complete risk factors, customer concentration, tax contingencies and longer-term contractual obligations.