II-VI Incorporated Form 10-Q Summary
Filing and period: The supplied filing is II-VI Incorporated’s Form 10-Q for the quarter and nine months ended March 31, 2021, filed May 7, 2021. The request metadata identifies Coherent Corp. and “2020 Q3,” but the filing is not a Coherent filing; it reports II-VI’s pending acquisition of Coherent.
Business Context and Reporting Period
II-VI develops and manufactures engineered materials, photonic and electronic components serving communications, consumer, industrial, aerospace and defense, semiconductor equipment, life sciences and automotive markets. Reportable segments are Photonic Solutions and Compound Semiconductors. The results include Finisar operations and the acquisitions of Ascatron and INNOViON.
The filing covers the three and nine months ended March 31, 2021, compared with the corresponding 2020 periods. Results are unaudited and may not indicate full-year performance.
Financial Performance and Position
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Revenue | $783.2 million, up 25% | $2,297.9 million, up 41% |
| Gross profit / margin | $299.6 million / 38.2% | $908.6 million / 39.5% |
| Operating income | $85.1 million | $304.9 million |
| Net earnings | $81.1 million | $215.3 million |
| Net earnings available to common shareholders | $74.1 million | $194.9 million |
| Diluted EPS | $0.66 | $1.78 |
| Operating cash flow | Not provided for the three-month period | $446.9 million |
Revenue was $627.0 million and $1,633.8 million in the comparable 2020 periods. Net earnings were $5.9 million and a net loss of $118.3 million, respectively. Basic EPS was $0.71 for the quarter and $1.88 for the nine-month period, versus $0.07 and $(1.43) in the prior-year periods.
At March 31, 2021, cash and cash equivalents were $1.535 billion, compared with $493.0 million at June 30, 2020. Total current assets were $2.889 billion and current liabilities were $678.8 million. Inventory increased to $673.7 million from $619.8 million.
Total debt was $1.385 billion, including $1.073 billion outstanding under the Term A Facility, $344.99 million of 0.25% convertible senior notes and $14.9 million of Finisar convertible notes. Debt declined from $2.255 billion at June 30, 2020 after repayment of the $720 million Term B Facility and other borrowings. Revolving credit availability was $448.6 million. The company stated that it was in compliance with all credit agreement financial covenants.
Material Changes Versus Prior Comparable Period
- Quarterly revenue increased 25%, primarily from higher communications and consumer electronics demand and the contribution from Finisar.
- Nine-month revenue increased 41%; Finisar contributed $1.060 billion in the current nine-month period versus $610.4 million in the prior-year period.
- Quarterly gross margin declined 100 basis points to 38.2% because of a shift toward lower-margin Photonic Solutions products. Nine-month gross margin improved 780 basis points to 39.5%, aided by the absence of the prior-year $87.7 million Finisar inventory fair-value step-up charge and favorable product mix.
- Research and development expense declined as a percentage of quarterly revenue to 10.6% from 15.1%, while SG&A increased to 16.8% from 13.1%, primarily because of Coherent transaction costs and other restructuring-related expenses.
- Interest and other expense improved to net income of $8.4 million in the quarter from net expense of $35.7 million, reflecting lower debt and an $11.4 million gain on the forward sale agreement associated with Bain Capital financing.
- Operating cash flow increased to $446.9 million from $120.5 million. Investing cash use fell to $140.8 million from $1.148 billion, largely because the prior-year period included the Finisar acquisition.
Outlook, Transactions, Risks and Unusual Items
On March 25, 2021, II-VI agreed to acquire Coherent. Coherent shareholders would receive $220 in cash plus 0.91 II-VI common shares for each Coherent share. The transaction requires shareholder, antitrust and other regulatory approvals, an effective Form S-4 registration statement and satisfaction of customary closing conditions. Management expected completion before the end of calendar 2021, but stated that the transaction could close later or not at all.
II-VI obtained commitments for up to $5.125 billion of acquisition debt financing. It also issued $750 million of Series B-1 convertible preferred stock to an affiliate of Bain Capital and agreed to issue $1.050 billion of Series B-2 preferred stock immediately before closing, with an option for up to an additional $350 million. The preferred securities accrue dividends at 5.0%, payable in kind before the fourth anniversary, subject to stated terms and potential increases upon default.
The company incurred $16.7 million of restructuring and transaction-related expenses in the quarter and $20.1 million during the nine-month period. Other unusual items included the $24.7 million write-off of Term B debt issuance costs, a $7.0 million gain from the INNOViON step acquisition and the $11.4 million forward sale agreement gain.
COVID-19 continued to create risks relating to supply chains, production, workforce restrictions, customer demand and global economic conditions. Management stated that the ultimate impact could not be reasonably estimated. Merger risks include regulatory failure, termination fees, integration difficulties, customer or employee disruption, substantial financing and transaction costs, and failure to achieve projected synergies.
No formal revenue or earnings guidance is presented in the supplied filing. Management’s outlook is primarily expressed through expected Coherent closing timing, anticipated merger benefits and continued investment to expand capacity.
Most Important Facts to Verify
- Confirm that the intended company and period are II-VI Incorporated and the quarter ended March 31, 2021, rather than Coherent Corp. or a 2020 quarter.
- Verify the status, regulatory approvals, financing and closing conditions of the pending Coherent acquisition.
- Assess the potential dilution, dividend burden and redemption or conversion terms of the Series A and Series B preferred stock.
- Reconcile the planned $5.125 billion acquisition financing with existing debt, covenant requirements and post-closing liquidity.
- Evaluate whether revenue growth and margin performance are sustainable after separating Finisar contributions, prior-year acquisition accounting effects and one-time gains.
- Monitor COVID-19 effects, supply-chain constraints, customer concentration and demand in communications and consumer electronics markets.
- Review conversion and potential dilution risk from the $345 million II-VI convertible notes, which were convertible during the quarter ending June 30, 2021.