Business Context and Reporting Period
The filing is a Form 10-Q for II-VI Incorporated, not Coherent Corp. as identified in the request metadata. It covers the three and six months ended December 31, 2012, the second quarter and first half of the company’s fiscal 2013. II-VI develops and manufactures engineered materials, optical components, laser products, thermoelectric solutions and related products serving industrial, defense, aerospace, optical communications, medical, semiconductor and consumer markets.
The company reported four segments: Infrared Optics, Near-Infrared Optics, Military & Materials, and Advanced Products Group. VLOC was reclassified from Near-Infrared Optics to Military & Materials beginning July 1, 2012, with prior periods revised for comparison.
Financial Highlights
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2012 | Six months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $125.9 million | $126.8 million | $258.2 million | $265.1 million |
| Gross margin | 37.3% | 34.3% | 37.1% | 37.1% |
| Earnings before taxes | $19.3 million | $15.7 million | $36.6 million | $40.3 million |
| Net earnings attributable to II-VI | $12.2 million | $13.3 million | $24.9 million | $31.9 million |
| Diluted EPS | $0.19 | $0.21 | $0.39 | $0.50 |
| Operating cash flow | Not separately provided | Not separately provided | $61.0 million | $42.9 million |
Bookings increased 9% year over year to $127.1 million in the quarter but declined 2% for the six-month period to $241.5 million. Quarterly revenue declined 1%; six-month revenue declined 3%.
Quarterly gross profit increased to $46.9 million from $43.5 million, primarily because of stronger Near-Infrared Optics results and recovery from the October 2011 Thailand flood. Six-month gross profit was $95.7 million versus $98.5 million, with the margin unchanged at 37.1%.
Research and development expense increased to $5.6 million, or 4.4% of revenue, in the quarter and $11.2 million, or 4.3%, for six months. Selling, general and administrative expense increased to $26.3 million, or 20.9% of revenue, in the quarter and $53.0 million, or 20.5%, for six months.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $162.8 million at December 31, 2012, up from $134.9 million at June 30, 2012. Approximately $119 million was held outside the United States.
- Total debt increased to $124.5 million from $12.8 million, primarily to fund acquisitions. The company had $20.2 million of remaining borrowing capacity, compared with $42.3 million at June 30, 2012.
- Operating cash flow was $61.0 million. Investing cash use was $135.7 million, including $126.4 million for acquisitions and $13.2 million for capital expenditures.
- Financing cash flow was $102.3 million, including $113.0 million of borrowings, $1.0 million of debt repayments and $10.8 million of treasury-stock purchases.
- The company entered into a $140 million unsecured revolving credit facility, expandable by up to $35 million under specified conditions, expiring in November 2017. The December 31, 2012 borrowing rate was 1.46%, and the company was in compliance with applicable covenants.
- Management stated that operating cash flow, cash reserves and available borrowing capacity should be sufficient for working capital, capital expenditures and growth objectives over the next twelve months.
Material Changes Versus the Prior Comparable Period
- Near-Infrared Optics revenue increased 14% in the quarter and 22% for six months; segment earnings increased 115% and 160%, respectively, due to higher Photop and Photop Aegis volumes and improved operating efficiency after the Thailand flood.
- Military & Materials revenue declined 30% in the quarter and 26% for six months, driven by lower selenium and tellurium demand and pricing at PRM and lower military shipments at VLOC. Six-month segment earnings shifted to a $3.2 million loss from $1.0 million of earnings.
- Advanced Products Group quarterly revenue increased 31% due largely to M Cubed, but six-month revenue declined 10%. Six-month segment earnings fell to a $0.5 million loss from $7.5 million of earnings, reflecting weaker Marlow gesture-recognition and telecommunications demand and lower WBG shipments.
- Infrared Optics revenue declined 3% in the quarter and 1% for six months, while segment earnings declined 8% and 6%, respectively, due to lower volume, higher raw-material costs and allocated acquisition-related expenses.
- The year-to-date effective tax rate rose to 30.0% from 20.0%. The company recorded $1.2 million of additional tax expense in the quarter from interim tax adjustments and experienced a shift toward higher-tax jurisdictions. The prior-year period benefited from approximately $2.0 million of tax benefits.
Acquisitions, Outlook, Risks and Unusual Items
- II-VI acquired M Cubed for $68.2 million net of cash acquired on November 1, 2012; it contributed $7.3 million of quarterly and year-to-date revenue, with immaterial earnings contribution.
- The company acquired Oclaro’s thin-film filter and interleaver businesses for $27.4 million on December 3, 2012. Contribution to reported results was not material.
- LightWorks Optics was acquired on December 21, 2012 for initial consideration of $31.5 million, including closing adjustments. It contributed no operating results during the reported periods. The transaction includes a potential $4.2 million earnout based on 2013 performance.
- Acquisition accounting remained preliminary. Goodwill increased by $42.0 million to $123.1 million, and identifiable intangible assets increased to $76.1 million. The company recorded approximately $0.9 million of acquisition transaction costs in the quarter and $1.2 million for six months.
- Other income included approximately $4.4 million related to a contractual settlement with a former Thailand flood contract manufacturer; total settlement proceeds received during the six months were $2.4 million, with additional accounting effects reflected in cost of sales.
- Management cited worldwide economic uncertainty, cautious customer spending, U.S. fiscal and budget uncertainty, potential sequestration, weaker military demand, lower commodity prices, reduced wireless and gesture-recognition demand, and customer order cancellations as business risks.
- Tellurium and selenium pricing is a material commodity risk. A 10% decline in index prices would have produced an estimated additional inventory write-down of approximately $1.4 million, or $0.02 per diluted share.
- Contractual obligations totaled $223.1 million, including $124.5 million of debt, $70.2 million of operating leases and $20.4 million of purchase obligations. The filing provides no specific full-year revenue or earnings guidance.
- Management concluded that disclosure controls and procedures were effective as of December 31, 2012, and reported no material changes to internal control over financial reporting during the quarter.
Investor Verification Priorities
- Verify the issuer identity: the supplied filing is for II-VI Incorporated, whereas the request identifies Coherent Corp.
- Assess whether the three acquisitions can produce the expected revenue, synergies and returns while increasing debt and goodwill.
- Monitor Military & Materials and Advanced Products Group recovery, particularly PRM commodity exposure, VLOC military demand, Marlow gesture-recognition demand and WBG wireless demand.
- Determine whether the elevated 30% effective tax rate persists and how foreign earnings mix, tax jurisdictions and uncertain tax positions affect future earnings.
- Review credit-facility availability, leverage and covenant headroom after acquisition financing; reported availability was only $20.2 million at quarter-end.
- Evaluate the sustainability of earnings excluding the Thailand settlement and other unusual items.
- Track inventory levels, raw-material prices, the $4.2 million LightWorks earnout and the final purchase-price allocations for all acquisitions.