II-VI Incorporated Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2018; fiscal year ended June 30. The provided filing is for II-VI Incorporated, not Coherent Corp.; investors should verify the requested issuer metadata.
Business Context
II-VI develops and manufactures engineered materials, optoelectronic components, photonic products and related systems serving industrial, optical communications, military, consumer electronics, semiconductor, life science, automotive and government markets. Reportable segments are II-VI Laser Solutions, II-VI Photonics and II-VI Performance Products. Segment composition was realigned effective July 1, 2018, with prior periods restated.
Financial Performance
| Metric | Three months ended December 31, 2018 | Three months ended December 31, 2017 | Six months ended December 31, 2018 | Six months ended December 31, 2017 |
|---|---|---|---|---|
| Revenue | $342.8 million | $281.5 million | $657.3 million | $543.0 million |
| Gross profit | $131.6 million | $109.4 million | $255.4 million | $215.4 million |
| Gross margin | 38.4% | 38.9% | 38.9% | 39.7% |
| Earnings before taxes | $34.7 million | $29.9 million | $67.1 million | $56.8 million |
| Net earnings | $28.7 million | $9.6 million | $54.9 million | $30.7 million |
| Diluted EPS | $0.44 | $0.15 | $0.83 | $0.47 |
- Quarterly revenue increased 22%; year-to-date revenue increased 21%.
- Quarterly net earnings increased approximately 199%, while year-to-date net earnings increased approximately 78%.
- The year-to-date effective tax rate was 18.2%, compared with 45.9% in the prior-year period. The prior period included approximately $15.8 million of Tax Cuts and Jobs Act transition-related charges.
- Research and development was $33.8 million, or 9.9% of quarterly revenue, and $66.9 million, or 10.2% year to date.
- SG&A was $58.1 million, or 16.9% of quarterly revenue, and $111.7 million, or 17.0% year to date. Merger-related expenses totaled approximately $7.1 million, and CoAdna transaction expenses totaled approximately $1.9 million year to date.
Segment Results
| Segment | Q2 2018 Revenue | Year-over-year change | Q2 2018 Operating Income | Year-over-year change |
|---|---|---|---|---|
| II-VI Laser Solutions | $105.6 million | 1% | $12.2 million | 28% |
| II-VI Photonics | $159.7 million | 39% | $23.1 million | 43% |
| II-VI Performance Products | $77.6 million | 27% | $11.4 million | 68% |
Growth was driven principally by optical communications demand in the United States and China, China broadband expansion, datacenter and metro upgrades, silicon carbide demand, and military applications. Photonics results included $7.1 million of CoAdna revenue in the quarter and $10.1 million year to date.
Cash Flow, Liquidity and Debt
- Six-month operating cash flow was $88.2 million, compared with $59.7 million in the prior-year period.
- Investing cash outflow was $133.0 million, including $74.4 million of capital expenditures, $54.2 million for business acquisitions and $4.5 million for an equity investment.
- Financing cash inflow was $31.3 million, principally reflecting $35.0 million of net borrowings.
- Cash and cash equivalents were $230.3 million at December 31, 2018, down from $247.0 million at June 30, 2018. Approximately $201 million was held outside the United States.
- Debt obligations for contractual-payment purposes totaled approximately $531.6 million, including $345.0 million of 0.25% convertible senior notes due 2022, $180.0 million of U.S. credit-facility borrowings, $2.7 million of Yen borrowings and $3.8 million of an assumed note payable. The balance-sheet carrying value of total debt was $480.5 million after discounts and issuance costs.
- Available borrowing capacity was $201.4 million, compared with $246.4 million at June 30, 2018. The company reported compliance with its credit-facility covenants.
- Management stated that operating cash flow, cash reserves and available borrowing capacity should fund working capital, capital expenditures, scheduled debt payments, research and development, the planned Finisar merger and other objectives for the next twelve months.
Material Changes and Unusual Items
- II-VI acquired CoAdna Holdings in September 2018 for approximately $85.0 million, inclusive of cash acquired, and acquired a product line in November 2018 for approximately $10.0 million. Purchase-price allocations remained preliminary.
- II-VI entered into a pending merger agreement with Finisar on November 8, 2018. Consideration is designed to be approximately 60% cash and 40% II-VI stock. The companies expected closing around mid-2019, subject to customary conditions; completion was not assured.
- II-VI obtained commitments for up to $2.425 billion of senior secured facilities intended to support the Finisar transaction, consisting of term loan and revolving facilities.
- The company adopted the revenue-recognition standard ASC 606 on July 1, 2018 using the modified retrospective method. Management reported no material opening-equity adjustment or expected material effect on fiscal 2019 results, liquidity or financial position.
- Gross margin declined year over year because of pricing pressure in China and a shift toward lower-margin Photonics products.
- Foreign-currency translation reduced accumulated other comprehensive income by $15.1 million during the six months.
Guidance, Outlook and Risks
- Management expects internal research and development to represent approximately 10% to 13% of revenue during the remainder of fiscal 2019.
- Management cited continued demand opportunities in optical communications, consumer electronics, silicon carbide, RF and power applications, and military markets, while noting pricing pressure, competition and lower-margin product mix in China.
- Key risks include failure to complete or finance the Finisar merger, integration of acquisitions, leverage and variable interest rates, foreign-exchange exposure, trade restrictions or trade wars, supply-chain constraints, technology and product-acceptance risks, customer purchasing patterns, international operations, intellectual-property protection, data breaches, impairment of goodwill or intangible assets and regulatory or economic changes.
- A 1% increase in applicable variable borrowing rates would have increased interest expense by approximately $0.2 million for the quarter and $0.9 million for the six months.
- Legal proceedings were described as routine and not expected by management to materially affect financial condition, liquidity or results, although unfavorable outcomes remain possible.
- Disclosure controls and procedures were assessed as effective, with no material changes to internal control over financial reporting during the quarter.
Investor Verification Checklist
- Confirm the issuer identity: the filing text identifies II-VI Incorporated, while the request identifies Coherent Corp.
- Verify completion status, final financing terms and resulting leverage of the planned Finisar acquisition.
- Assess whether optical-communications pricing pressure and lower-margin product mix could further reduce gross margin.
- Reconcile contractual debt obligations of approximately $531.6 million with the $480.5 million balance-sheet carrying value.
- Review preliminary purchase-price allocations and subsequent impairment or integration disclosures for CoAdna and the acquired product line.
- Monitor cash held outside the United States, available borrowing capacity, covenant compliance and scheduled debt maturities.
- Evaluate the sustainability of earnings growth after excluding the prior-year Tax Act charge, merger-related costs, acquisition costs and other unusual items.