II-VI Incorporated Form 10-Q Summary
Filing identity: The supplied filing is for II-VI Incorporated, not Coherent Corp. It covers the fiscal quarter ended September 30, 2020, the first quarter of fiscal 2021. The financial statements are unaudited. Finisar results are included for the full quarter following its September 2019 acquisition.
Business Context and Reporting Period
II-VI develops and manufactures engineered materials, photonic and electronic components, and related products serving communications, industrial, consumer electronics, aerospace and defense, semiconductor equipment, life sciences, automotive and other markets. Reportable segments are Photonic Solutions and Compound Semiconductors.
The company completed the acquisition of Ascatron AB on August 20, 2020 for approximately $36.7 million and acquired the remaining interests in Innovion Corporation on October 1, 2020, after quarter-end.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $728.1 million | $340.4 million | Up 114% |
| Gross profit | $286.6 million | $123.1 million | Up 133% |
| Gross margin | 39.4% | 36.2% | Up 320 bps |
| Operating income | $101.1 million | $(18.5) million | Improved |
| Earnings before taxes | $59.6 million | $(30.5) million | Improved |
| Net earnings | $46.3 million | $(26.0) million | Returned to profit |
| Net earnings available to common shareholders | $39.8 million | $(26.0) million | Improved |
| Diluted EPS | $0.38 | $(0.39) | Improved |
| Cash flow from operations | $134.3 million | $(25.6) million | Improved |
| Capital expenditures | $33.8 million | $25.6 million | Up |
Internal research and development was $78.2 million, or 10.7% of revenue, compared with $36.1 million, or 10.6%, in the prior-year quarter. Selling, general and administrative expense was $107.2 million, or 14.7% of revenue, compared with $105.5 million, or 31.0%.
At September 30, 2020, cash and cash equivalents were $684.0 million, compared with $493.0 million at June 30, 2020. Total assets were $5.47 billion and shareholders’ equity was $3.05 billion.
Total debt was $1.53 billion, down from $2.26 billion at June 30, 2020. The company repaid the $720 million Term B Facility during the quarter. It reported $399.6 million of borrowing availability under its line of credit and compliance with all debt covenants. The weighted-average interest rate on borrowings was 1.8%.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from the inclusion of Finisar operations, which contributed $337.6 million, as well as higher demand for ROADM, 3D sensing, data-center and 5G optical products.
- Photonic Solutions revenue increased 252% to $497.7 million, and operating income increased 287% to $50.4 million, driven by Finisar, cloud and 5G demand, synergies and plant efficiencies.
- Compound Semiconductors revenue increased 30% to $230.4 million, while operating income increased 91% to $50.7 million, supported by 3D sensing, telecom, datacom, transceiver and 5G products.
- Gross margin expanded to 39.4%, primarily from higher-margin transceiver products acquired with Finisar and favorable product mix.
- Interest and other expense increased to $41.6 million from $12.0 million. The current quarter included $24.7 million of debt issuance costs expensed when the Term B Facility was repaid and $4.7 million of foreign-currency losses.
- The company raised approximately $883.9 million net through July 2020 common-stock and mandatory-convertible-preferred-stock offerings. The offerings increased common shares outstanding and introduced $6.4 million of preferred dividends in the quarter.
- Cash used in investing activities fell to $69.9 million from $1.06 billion, reflecting the prior-year Finisar acquisition. Current-quarter investing primarily comprised the Ascatron acquisition and capital expenditures.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide a specific numerical revenue or earnings outlook in the supplied filing. Management described continued investment in 3D sensing, 5G, cloud, electric vehicles and other emerging markets, and cited demand growth in cloud, 5G optical infrastructure, consumer 3D sensing and higher-margin semiconductor products.
COVID-19 remained a significant uncertainty. Approximately 45% of global facilities were subject to government orders at the reporting date, including approximately 10% that were closed, although most closed facilities were administrative sites with remote work. Management stated that cash balances, committed borrowing availability and other liquidity arrangements were expected to support working capital, capital expenditures, debt repayments and other requirements, and that current estimates indicated continued covenant compliance. The company stated that the ultimate impact of the pandemic could not reasonably be estimated.
Other notable matters include the preliminary accounting for Ascatron, foreign-currency exposure, variable-rate debt, and a $1.075 billion interest-rate swap with a fixed payment rate of 1.52%. A 100-basis-point rate increase on unhedged variable-rate borrowings would have increased quarterly interest expense by approximately $3.4 million.
The company disclosed routine claims, lawsuits and regulatory proceedings and stated that management does not expect them to materially affect financial condition, liquidity or results of operations. Unrecognized tax benefits totaled $40.5 million at September 30, 2020, and certain foreign and domestic tax examinations were ongoing.
Facts Investors Should Verify
- Confirm the requested issuer: the supplied filing identifies II-VI Incorporated, whereas the request metadata identifies Coherent Corp.
- Assess the sustainability of revenue and margin growth after separating Finisar acquisition effects from organic growth.
- Review the impact of the July equity offerings, mandatory preferred conversion terms and potential dilution; 18.3 million potential shares were excluded as anti-dilutive in the quarter.
- Verify debt repayment progress, covenant thresholds, refinancing needs and the maturity or conversion terms of the 2022 convertible notes.
- Monitor COVID-19 effects on facilities, suppliers, customers, demand and global operations.
- Evaluate integration and purchase-accounting risks related to Finisar, Ascatron and the post-quarter-end Innovion acquisition.
- Review foreign-currency exposure, interest-rate swap valuation and the company’s tax examinations and uncertain tax positions.