Filing Summary
Scope clarification: The supplied filing is II-VI Incorporated’s Form 10-Q for the quarter ended March 31, 2022, filed May 10, 2022. It is not a Coherent Corp. filing, although it discusses II-VI’s pending acquisition of Coherent. The filing covers the three and nine months ended March 31, 2022, compared with the corresponding 2021 periods.
Business Context and Reporting Period
II-VI develops and manufactures engineered materials, photonic components, compound semiconductors and related products serving communications, industrial, aerospace and defense, consumer electronics, semiconductor capital equipment, life sciences and automotive markets. Reportable segments are Photonic Solutions and Compound Semiconductors.
The financial statements are unaudited and prepared under U.S. GAAP. Management continued to monitor COVID-19-related supply-chain, logistics and customer-demand effects. The filing states that results for the nine months ended March 31, 2022 are not necessarily indicative of the full fiscal year.
Financial Metrics
| Metric | Q3 FY2022 | Q3 FY2021 | 9M FY2022 | 9M FY2021 |
|---|---|---|---|---|
| Revenue | $827.7 million | $783.2 million | $2.430 billion | $2.298 billion |
| Gross profit | $321.7 million | $290.0 million | $939.5 million | $879.7 million |
| Gross margin | 38.9% | 37.0% | 38.7% | 38.3% |
| Net earnings | $49.0 million | $81.1 million | $191.1 million | $215.3 million |
| Net margin | 5.9% | 10.4% | 7.9% | 9.4% |
| Diluted EPS | $0.28 | $0.66 | $1.22 | $1.78 |
| Cash flow from operations | Not separately provided | Not separately provided | $276.0 million | $446.9 million |
| Capital expenditures | $94.3 million | $26.0 million | $196.0 million | $105.3 million |
At March 31, 2022, cash, cash equivalents and restricted cash totaled $2.600 billion, including $990 million of restricted cash associated with the Senior Notes. Total debt was $2.313 billion, consisting primarily of the $1.011 billion Term A Facility, $990 million of 5.0% Senior Notes due 2029 and $345 million of 0.25% convertible notes. The company reported $450 million of availability under its revolving credit facility and compliance with applicable debt covenants.
Total assets were $7.767 billion, compared with $6.513 billion at June 30, 2021. Inventories increased to $879.5 million from $695.8 million, reflecting efforts to mitigate supply-chain and logistics disruptions.
Material Changes Versus Prior Comparable Period
- Revenue increased 6% in both the quarter and nine-month period, driven primarily by communications, industrial and semiconductor capital equipment demand.
- Photonic Solutions revenue increased 12% to $567.8 million in the quarter and 9% to $1.629 billion for nine months, supported by communications demand.
- Compound Semiconductors revenue decreased 6% to $259.9 million in the quarter and 1% to $800.9 million for nine months. Lower 3D-sensing revenue offset growth in industrial and semiconductor capital equipment markets.
- Gross margin improved by approximately 190 basis points in the quarter and 40 basis points for nine months, primarily due to product mix and increased shipments.
- Net earnings declined 40% in the quarter and 11% for nine months. Interest expense rose materially because of financing activities related to the proposed Coherent acquisition, while the prior-year quarter included an $11 million mark-to-market gain on Series B preferred shares.
- Operating cash flow decreased $170.8 million year over year, primarily because inventory investment increased by approximately $157 million and net earnings declined.
- Capital expenditures increased substantially to support capacity expansion.
- SG&A decreased in the quarter because of cost controls but increased for nine months, including $13 million of incremental merger integration and transaction costs.
- II-VI adopted ASU 2020-06 on July 1, 2021, increasing the carrying value of its current convertible debt and reducing shareholders’ equity by approximately $11 million.
Guidance, Outlook, Risks and Unusual Items
Management anticipated completing the Coherent merger by the end of the second calendar quarter of 2022, subject to regulatory approvals and other closing conditions. The transaction consideration is $220 in cash plus 0.91 II-VI shares for each Coherent share. The transaction could be delayed or not completed.
II-VI issued $990 million of 5.0% Senior Notes due December 2029 to help fund the transaction. If the merger is not completed by December 15, 2022, or is abandoned, the company must redeem the notes at par plus accrued interest. Until the merger closes or the special mandatory redemption date occurs, the proceeds are restricted.
II-VI had allocated $4.0 billion of remaining merger-related financing commitments, including planned new term facilities and a new revolving facility. The filing does not provide a formal revenue or earnings guidance range.
- COVID-19-related supply shortages, production constraints, logistics delays and increased freight costs remain material risks.
- Inventory growth and working-capital requirements may continue to pressure operating cash flow.
- The proposed merger would significantly increase leverage and integration complexity; failure to obtain regulatory approvals or satisfy closing conditions could trigger financing consequences.
- Variable-rate debt exposes the company to interest-rate risk. An interest-rate swap hedges $1.075 billion of borrowings, and a new interest-rate cap becomes effective July 1, 2023.
- The $345 million convertible notes become broadly convertible beginning June 1, 2022 and mature September 1, 2022.
- The company reported approximately $40 million of gross unrecognized tax benefits, with multiple domestic and foreign tax examinations ongoing.
- Management stated that existing legal and regulatory proceedings are not expected to materially affect financial condition, liquidity or results of operations, although unfavorable outcomes remain possible.
Most Important Facts to Verify
- Confirm that the intended issuer and period are II-VI Incorporated, fiscal third quarter 2022, rather than Coherent Corp. or 2021 Q3.
- Verify the closing status, regulatory approvals, financing and final consideration of the Coherent acquisition.
- Assess the company’s post-merger leverage, debt maturities, interest costs and availability under new credit facilities.
- Determine whether the $990 million restricted cash balance remains restricted and whether the Senior Notes are redeemed or used to fund the merger.
- Monitor inventory levels, supply-chain constraints, capital expenditures and the resulting effect on operating cash flow.
- Review the September 1, 2022 maturity and conversion settlement of the 0.25% convertible notes.
- Reconcile segment performance, especially continued communications growth and weakness in 3D sensing and consumer-related demand.