Business Context and Reporting Period
The filing is II-VI Incorporated’s unaudited Form 10-Q for the quarter and six months ended December 31, 2021, filed February 9, 2022. The request metadata identifies Coherent Corp., but the supplied filing is for II-VI Incorporated, which was pursuing the acquisition of Coherent, Inc. II-VI develops engineered materials, photonic and electronic components serving communications, industrial, aerospace and defense, consumer, semiconductor equipment, life sciences and automotive markets.
Reportable segments are Photonic Solutions and Compound Semiconductors. The filing states that COVID-19, supply-chain shortages and logistics constraints continued to affect operations and costs.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Revenue | $806.8 million | $786.6 million | $1,601.9 million | $1,514.7 million |
| Gross profit | $311.2 million | $312.7 million | $617.8 million | $589.7 million |
| Gross margin | 38.6% | 39.8% | 38.6% | 38.9% |
| Earnings before income taxes | $79.4 million | $106.3 million | $169.8 million | $165.9 million |
| Net earnings | $67.7 million | $87.9 million | $142.1 million | $134.2 million |
| Net earnings available to common shareholders | $51.0 million | $81.0 million | $108.3 million | $120.8 million |
| Diluted EPS | $0.44 | $0.73 | $0.94 | $1.12 |
| Operating cash flow | Not separately provided | Not separately provided | $240.1 million | $355.7 million |
- Research and development expense was $95.3 million in the quarter and $184.3 million year to date, up 12% and 13%, respectively.
- SG&A expense was $117.6 million in the quarter and $240.2 million year to date, with current-period merger costs of approximately $20 million versus $3 million in the prior comparable periods.
- The year-to-date effective tax rate was 16%, compared with 19% in the prior year.
- Photonic Solutions revenue increased 9% in the quarter and 8% year to date; Compound Semiconductors revenue decreased 7% in the quarter and increased 1% year to date.
Liquidity, Cash Flow and Debt
- Cash, cash equivalents and restricted cash totaled $2.650 billion at December 31, 2021, compared with $1.592 billion at June 30, 2021. The balance included $990 million of restricted cash related to the Senior Notes.
- Total debt was $2.321 billion at December 31, 2021, compared with $1.375 billion at June 30, 2021. Current debt was $1.378 billion and long-term debt was $942.6 million.
- The company issued $990 million of 5.000% Senior Notes due December 2029. Proceeds were intended to support the Coherent merger, repay certain indebtedness and fund related fees and expenses.
- The company had $450 million of availability under its existing revolving credit facility and reported compliance with applicable credit agreement and Senior Notes covenants.
- Operating cash flow declined by $115.6 million year over year, primarily because of increased working-capital requirements associated with supply-chain challenges. Inventory increased to $819.1 million from $695.8 million at June 30, 2021.
- Capital expenditures were $101.7 million year to date, compared with $79.3 million in the prior year, primarily to expand capacity.
- Financing activities provided $910.9 million, principally from the Senior Notes issuance. The company paid $20.7 million in dividends and made $31.0 million of Term A Facility repayments.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 3%, while year-to-date revenue increased 6%, driven principally by industrial and communications demand, including 200G, 400G and 800G products.
- Quarterly gross margin declined approximately 120 basis points because of higher component costs from supply shortages and additional COVID-19-related costs. Year-to-date gross margin declined approximately 30 basis points.
- Quarterly net earnings declined 23% and diluted EPS declined 40%, reflecting lower gross margin, higher R&D and SG&A expense, merger-related costs and higher financing expense.
- Year-to-date net earnings increased 6%, but earnings available to common shareholders declined 10% because of dividends and deemed dividends on the Series A and Series B preferred stock.
- Compound Semiconductors quarterly operating income declined 19%, primarily because of $11 million of additional operating expense related to starting up new devices for customer applications.
- The company adopted ASU 2020-06 on July 1, 2021. The adoption increased current debt by approximately $15 million, reduced deferred tax liabilities by approximately $3 million and reduced shareholders’ equity by approximately $11 million.
Guidance, Outlook, Risks and Unusual Items
- II-VI expected the Coherent merger to close by the middle of the second calendar quarter of 2022, subject to customary conditions, including review and approval by China’s State Administration for Market Regulation. The filing cautions that closing could be delayed or not occur.
- Under the merger agreement, each Coherent share was to receive $220 in cash plus 0.91 II-VI shares, subject to the agreement’s terms.
- New financing commitments had been priced and allocated: an $850 million New Term A Facility, a $2.8 billion New Term B Facility and a $350 million New Revolving Credit Facility. These facilities were expected to fund or become available at the merger closing.
- If the merger was not completed by December 15, 2022, or was terminated or abandoned, the Senior Notes would be subject to mandatory redemption at 100% of principal plus accrued interest.
- Management identified continuing risks from COVID-19, supply-chain and production disruptions, component availability, logistics costs, customer delays or cancellations, foreign currency exposure, integration and financing of the Coherent merger, and competitive market conditions.
- Interest-rate exposure was partly hedged through a swap with a $1.075 billion notional amount. Without the hedge, a 100-basis-point change in variable borrowing rates would have affected interest expense by approximately $11 million for the reported quarter and six-month period.
- The company reported no material expected adverse effect from legal proceedings and stated that disclosure controls were effective as of December 31, 2021.
Investor Verification Items
- Verify the issuer identity: the supplied filing is II-VI Incorporated, not Coherent Corp.; verify whether the intended filing was a later post-merger Coherent filing.
- Verify completion, timing and regulatory approval of the Coherent merger, including the final cash and stock consideration and related integration costs.
- Assess the post-closing debt structure, leverage, covenant compliance, interest expense and use or redemption of the $990 million Senior Notes.
- Monitor whether supply-chain shortages, elevated inventory, logistics costs and COVID-19 disruptions affect margins and operating cash flow.
- Evaluate dilution from the Series A and Series B convertible preferred stock, convertible notes and merger-related equity issuance.
- Review the company’s full-year outlook in subsequent filings, as this 10-Q does not provide a clear quantitative revenue or earnings guidance range.