II-VI Incorporated — Form 10-Q Summary
Reporting period: Three and six months ended December 31, 2019. The filing identifies the registrant as II-VI Incorporated, not Coherent Corp. Results are unaudited and include Finisar Corporation from its September 24, 2019 acquisition date.
Business context
II-VI develops and manufactures engineered materials, photonic and electronic components serving optical communications, industrial processing, aerospace and defense, consumer electronics, semiconductor equipment, life sciences and automotive markets. Effective July 1, 2019, the company reorganized into Compound Semiconductors and Photonic Solutions.
Key financial metrics
| Metric | Three months ended Dec. 31, 2019 | Prior-year comparable | Six months ended Dec. 31, 2019 | Prior-year comparable |
|---|---|---|---|---|
| Revenue | $666.3 million | $342.8 million | $1,006.7 million | $657.3 million |
| Gross margin | $148.3 million; 22.3% | $131.6 million; 38.4% | $271.4 million; 27.0% | $255.4 million; 38.9% |
| Net earnings (loss) | $(98.2) million | $28.7 million | $(124.2) million | $54.9 million |
| Diluted EPS | $(1.08) | $0.44 | $(1.58) | $0.83 |
| Operating cash flow | Not separately presented for the quarter | $56.3 million | $88.2 million |
- Revenue increased 94% for the quarter and 53% year to date. Finisar contributed $306.6 million and $328.7 million, respectively.
- Cost of goods sold was $518.0 million for the quarter and $735.3 million year to date. Research and development was $107.7 million and $143.8 million; selling, general and administrative expense was $119.2 million and $224.7 million.
- Cash and cash equivalents were $376.8 million at December 31, 2019, compared with $204.9 million at June 30, 2019. Current assets were $1.589 billion versus current liabilities of $571.6 million.
- Total debt was $2.297 billion, including $2.228 billion of long-term debt. Revolving-credit availability was $356.0 million.
- Total assets were $5.208 billion, including $1.097 billion of goodwill and $929.8 million of other intangible assets. Shareholders’ equity was $2.066 billion.
- Capital expenditures were $80.3 million for the six months, and cash paid for the Finisar acquisition was $1.037 billion.
Material changes versus the prior comparable period
- The Finisar acquisition materially expanded revenue and assets but also added acquisition-related costs, purchase-accounting adjustments, amortization and debt-service costs.
- Acquisition-related expenses were $119.9 million in the quarter and $185.6 million for the six months. The quarter included $80.6 million of acquired-inventory fair-value expense and $29.1 million of acquired-intangible amortization.
- Gross margin declined because of the Finisar inventory step-up and a greater mix of lower-margin transceiver products.
- Compound Semiconductors revenue rose 12% in the quarter and 6% year to date, but quarterly operating results declined to an $8.8 million loss. Photonic Solutions revenue rose 188% in the quarter and 104% year to date, while operating results declined to a $60.9 million loss, primarily from acquisition-related charges.
- Debt increased substantially to finance the acquisition. Interest expense rose to $28.4 million for the quarter and $35.4 million for the six months, versus $5.6 million and $11.2 million, respectively.
- Operating cash flow fell to $56.3 million from $88.2 million, while financing activities generated $1.232 billion, primarily from new borrowings.
Guidance, outlook, risks and unusual items
- The filing does not provide explicit numerical revenue or earnings guidance. Management expects the Sherman, Texas wafer fabrication facility to begin customer shipments in the second half of fiscal 2020.
- Management cites demand growth in ROADM optical communications products, VCSEL products used in 3D sensing, aerospace and defense, and transceiver products. It also expects continued investment in 5G and other emerging technologies.
- The new senior credit facilities provide $2.425 billion of aggregate commitments: a $1.255 billion Term A facility, a $720 million Term B facility and a $450 million revolving facility. The company was in compliance with its financial covenants at December 31, 2019.
- The company entered into a $1.075 billion interest-rate swap, effectively converting part of its variable-rate debt to fixed-rate exposure. Without the swap, a 100-basis-point rate increase would have increased interest expense by an estimated $19.7 million for the quarter and $22.1 million for the six months.
- Finisar’s purchase-price allocation remains preliminary and may be revised materially during the measurement period. Goodwill from the acquisition was preliminarily recorded at $774.1 million.
- Unrecognized income-tax benefits increased to $74.0 million, including $64.0 million assumed in the Finisar acquisition. Several domestic and foreign tax years remain open for examination.
- Management identifies risks from customer purchasing patterns, product acceptance, competition, acquisition integration, foreign currency, interest rates, global economic conditions and worldwide health epidemics, including coronavirus-related disruption.
- The company reported no material legal-proceedings liability expected to affect financial condition, liquidity or results of operations. Disclosure controls were considered effective; Finisar was excluded from the planned fiscal 2020 internal-control assessment under SEC rules while integration continues.
Important facts investors should verify
- Confirm the filing identity and period: II-VI Incorporated, quarter ended December 31, 2019, rather than Coherent Corp. or a “2019 Q2” label.
- Assess whether Finisar integration, acquisition accounting, inventory step-up and intangible amortization explain the sharp margin and earnings deterioration.
- Review debt maturities, covenant calculations, refinancing requirements and available revolver capacity following the acquisition.
- Evaluate working-capital trends, particularly inventories of $663.0 million and accounts receivable of $488.9 million, against operating cash flow.
- Monitor the preliminary purchase-price allocation, goodwill and intangible-asset impairment risk.
- Review the company’s exposure to transceiver demand, 3D sensing, optical communications, the Sherman facility ramp, foreign exchange and potential coronavirus-related supply-chain disruption.