COHERENT CORP. quarterly report, Q1 FY2022

II-VI Incorporated Form 10-Q Summary

Important identification: The supplied filing is for II-VI Incorporated, not Coherent Corp. It covers the quarter ended September 30, 2021, the first quarter of fiscal 2022, and was filed November 9, 2021. II-VI was pursuing its pending acquisition of Coherent, Inc.

Business Context and Reporting Period

II-VI develops and manufactures engineered materials, photonic components and electronic products serving communications, industrial, aerospace and defense, consumer electronics, semiconductor capital equipment, life sciences and automotive markets. Reportable segments were Photonic Solutions and Compound Semiconductors.

The Coherent transaction was approved by both companies’ shareholders on June 24, 2021. Closing remained subject to customary conditions, including Chinese regulatory approval, with management expecting completion in the first calendar quarter of 2022. The transaction consideration was $220 in cash plus 0.91 II-VI shares per Coherent share.

Financial Performance and Key Metrics

Metric	Q1 FY2022	Q1 FY2021	Change
Revenue	$795.1 million	$728.1 million	Up 9%
Gross profit	$316.2 million	$286.6 million	Up 10%
Gross margin	40%	39%	Up 40 basis points
Earnings before taxes	$90.4 million	$59.6 million	Up 52%
Net earnings	$74.5 million	$46.3 million	Up 61%
Net earnings available to common shareholders	$57.4 million	$39.8 million	Up 44%
Diluted EPS	$0.50	$0.38	Up 32%
Operating cash flow	$52.3 million	$134.3 million	Down $82.0 million

Revenue growth reflected higher demand in communications, industrial, semiconductor capital equipment and consumer electronics markets.
Photonic Solutions revenue increased 8% to $536.0 million and operating income increased 12% to $56.5 million.
Compound Semiconductors revenue increased 12% to $259.1 million, while operating income declined 2% to $49.7 million as increased research and development spending offset volume and margin gains.
Research and development expense increased to $89.0 million from $78.2 million, primarily due to investment in power electronics and sensing products.
SG&A increased to $132.2 million from $107.2 million, including $12 million of Coherent transaction costs versus $2 million of acquisition-related costs in the prior-year period.
Interest and other expense, net decreased to $4.6 million from $41.6 million, primarily because the prior-year period included $24.7 million of debt extinguishment costs and unfavorable foreign currency effects.
The effective tax rate was 18%, compared with 22% in the prior-year period.

Cash Flow, Liquidity and Capital Structure

Cash and cash equivalents were $1.56 billion at September 30, 2021, compared with $1.59 billion at June 30, 2021.
Operating cash flow was reduced by higher working-capital requirements, including a $56.3 million increase in inventories. Inventory increased to $747.4 million from $695.8 million at June 30, 2021.
Capital expenditures were $47.6 million, compared with $33.8 million in the prior-year period. Additions to property, plant and equipment included $38.4 million recorded in accounts payable.
Total debt was $1.38 billion, including $420.0 million classified as current and $956.4 million classified as long term. The $345 million principal amount of 0.25% convertible notes due 2022 was included in current debt.
The company had $450 million of availability under its revolving credit facility and was in compliance with its financial covenants.
II-VI had a $1.075 billion interest-rate swap, with a fair value of $25 million, to hedge variable-rate borrowings.
II-VI issued $750 million of Series B-1 convertible preferred stock to an affiliate of Bain Capital in March 2021. The total equity commitment related to the pending Coherent acquisition, including planned Series B-2 and upsize shares, was $2.2 billion.
Debt financing commitments for the acquisition were reduced to $4.99 billion on October 25, 2021, subject to customary conditions.

Material Changes Versus the Prior Comparable Period

Revenue, gross profit and net income improved, supported by higher volume and product mix.
Gross margin improved to 40% from 39%.
Operating cash flow declined substantially because of working-capital investment, particularly inventory and accrued compensation changes.
Capital expenditures increased as II-VI expanded capacity.
Interest and other expense improved materially because the prior-year period included debt extinguishment costs and unfavorable foreign currency movements.
Preferred-stock dividends increased, including approximately $9.7 million of Series B dividends and deemed dividends, reducing earnings available to common shareholders.
II-VI adopted ASU 2020-06 for convertible debt accounting on July 1, 2021. Adoption increased current debt by approximately $15 million, reduced deferred taxes by approximately $3 million and reduced shareholders’ equity by approximately $11 million.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide a specific quantitative revenue or earnings forecast.
Management described sustained demand in optical communications and growth in industrial, semiconductor capital equipment and consumer electronics markets.
COVID-19 continued to create supply-chain, production, logistics and customer-demand risks. Management stated that the ultimate financial impact could not be reasonably estimated.
The pending Coherent acquisition remained subject to regulatory approval and other closing conditions and might close later than expected or not close at all.
The acquisition required substantial committed debt and preferred-equity financing, creating execution, leverage and integration risks.
Other risks included foreign-currency exposure, variable interest rates, supply constraints, increased freight costs, customer collection risk, competitive pressures and potential dilution from convertible debt and preferred stock.
Management stated that disclosure controls were effective and that legal proceedings were not expected to materially affect financial condition, liquidity or results of operations.

Important Facts for Investors to Verify

Confirm that the filing entity and period are II-VI Incorporated for the quarter ended September 30, 2021, rather than Coherent Corp.
Track completion of the Coherent acquisition, including Chinese regulatory approval, transaction funding and the final amount of debt and preferred equity issued.
Assess whether inventory growth and reduced operating cash flow reflect temporary capacity expansion or emerging demand and supply-chain risk.
Review the maturity, refinancing or repayment of the $345 million convertible notes due 2022 and related dilution potential.
Evaluate post-transaction leverage against the credit agreement’s interest-coverage and net-leverage covenants.
Consider the dilution and dividend priority associated with Series A and Series B preferred stock and outstanding convertible instruments.
Monitor COVID-19 effects, supplier capacity, freight costs, foreign-currency movements and customer order variability.