COHERENT CORP. annual report, FY2021

Filing Scope and Business Context

This source is II-VI Incorporated’s Form 10-K for the fiscal year ended June 30, 2021, filed August 20, 2021. It is not a Coherent Corp. filing and does not represent “2020 Q4”; the filing includes unaudited quarterly data for II-VI’s quarter ended June 30, 2021. II-VI develops engineered materials, optoelectronic components, devices and subsystems 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 company employed approximately 23,000 people worldwide and operated globally, with significant manufacturing and sales exposure to Asia.

Financial Performance and Liquidity

Metric	FY2021	FY2020	Change
Revenue	$3.106 billion	$2.380 billion	+30%
Gross profit / margin	$1.216 billion / 39%	$820 million / 34%	+470 basis points
Operating income	$402 million	$39 million	Material increase
Net earnings (loss)	$298 million	$(67) million	Returned to profitability
Diluted EPS	$2.37	$(0.79)	Improved
Net cash from operations	$574 million	$297 million	+93%
Capital expenditures	$146 million	$137 million	+7%

FY2021 earnings before tax were $353 million, compared with a $64 million loss before tax in FY2020. Income tax expense was $55 million, producing a 16% effective tax rate versus a negative 5% rate in FY2020. Interest and other expense declined to $50 million from $103 million, primarily because of lower debt following repayment of the Term B facility.

At June 30, 2021, cash and cash equivalents were $1.592 billion, working capital was $2.298 billion, and total debt was $1.375 billion, including $1.313 billion of long-term debt. Revolving-credit availability was $449 million. Management stated that cash flow, cash reserves and borrowing capacity were expected to fund operations, capital expenditures, scheduled debt repayments and growth objectives through at least fiscal 2022. The company was in compliance with its debt covenants.

Contractual obligations totaled approximately $2.080 billion, including $1.417 billion of debt principal, $193 million of operating lease obligations, $30 million of finance lease obligations and $387 million of purchase and sponsorship obligations.

Segment and Operating Trends

Photonic Solutions: Revenue increased 33% to $2.038 billion and operating income increased to $208 million from $50 million. Growth reflected a full year of Finisar revenue, stronger transceiver demand and higher-volume 200G and 400G products.
Compound Semiconductors: Revenue increased 30% to $1.068 billion and operating income increased to $221 million from $62 million. Drivers included more than 100% growth in VCSEL shipments for 3D sensing, improved cost absorption and stronger life sciences demand.
End markets: Communications revenue was $2.053 billion, consumer revenue was $286 million, industrial revenue was $326 million, aerospace and defense revenue was $202 million, and other markets contributed $239 million.
Bookings and backlog: FY2021 bookings were approximately $3.3 billion versus $2.7 billion in FY2020. Backlog was approximately $1.252 billion at June 30, 2021 versus $957 million a year earlier.

Material Changes Versus the Prior Comparable Period

Revenue benefited from the inclusion of a full fiscal year of Finisar operations, compared with only a partial period in FY2020.
Gross margin improved substantially because FY2020 included an $87.7 million Finisar inventory fair-value step-up and related acquisition effects that did not recur.
Internal R&D declined to $330 million, or 11% of revenue, from $339 million, or 14% of revenue, while SG&A increased to $484 million from $441 million due partly to transaction and integration costs, stock compensation and acquired operations.
Debt declined by approximately $880 million year over year, mainly following repayment of the $720 million Term B facility after the July 2020 equity offerings.
Cash increased by approximately $1.099 billion during FY2021, supported by operating cash flow and $1.611 billion of net equity proceeds, partly offset by debt repayment and capital expenditures.
II-VI acquired Ascatron for approximately $37 million and acquired the remaining 6.1% of Innovion for approximately $4 million.

Pending Coherent Acquisition, Outlook and Unusual Items

On March 25, 2021, II-VI agreed to acquire Coherent, Inc. for $220 in cash plus 0.91 II-VI common shares per Coherent share, subject to closing conditions. Shareholders of both companies approved the transaction on June 24, 2021. At the reporting date, regulatory approval in China and other customary conditions remained outstanding; management expected closing by the end of the first calendar quarter of 2022, although completion was not assured.

II-VI had commitments for up to $5.1 billion of acquisition-related debt financing and had issued $750 million of Series B-1 convertible preferred stock to an affiliate of Bain Capital. The total equity commitment, including planned Series B-2 shares and upsize shares, was expected to reach $2.2 billion. Pro forma consolidated debt after the acquisition and related financing was estimated at approximately $5.1 billion.

Management expected the acquisition to be accretive to adjusted EPS in the second year after closing, but characterized the estimate as preliminary. The company also expected substantial transaction and integration costs. If the transaction were terminated under specified circumstances, II-VI could owe a $500 million termination fee.

Other unusual items included $25 million of debt issuance costs expensed upon Term B repayment, a $7 million gain related to the Innovion step acquisition, an $11 million gain on the Series B forward-sale commitment and $27 million of Series B-related transaction costs. The company declared $27 million of Series A preferred dividends and recognized $10 million of Series B preferred dividends and deemed dividends in FY2021.

COVID-19 continued to create supply-chain, workforce and demand uncertainty. Management reported that existing liquidity was sufficient and that it expected to remain compliant with debt covenants, but stated that the pandemic’s ultimate effect could not be reasonably estimated.

Principal Risks and Contingencies

Execution, regulatory approval, financing, dilution, leverage and integration risks associated with the pending Coherent acquisition.
Substantial debt obligations, restrictive covenants, convertible-note conversion or repurchase requirements, and potential refinancing needs.
Dependence on cyclical industrial, communications, semiconductor and consumer markets and on a limited number of significant customers.
Supply-chain shortages, limited-source materials, manufacturing-yield issues, commodity-price exposure and potential product defects.
Foreign-exchange volatility, tariffs, export controls, sanctions, geopolitical developments and complex global regulatory requirements.
COVID-19 or other health crises, natural disasters, cybersecurity incidents and climate-related regulation.
Competition and the need for continued investment in research, development, manufacturing capacity and new technologies.
Legal proceedings were described as incidental to the business; management believed any resulting liabilities would not materially affect financial condition, liquidity or results of operations.

Ernst & Young LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management identified Ascatron and Innovion as excluded from the FY2021 internal-control assessment because of their recent acquisitions; the excluded entities represented approximately $141.4 million of total assets and $22.4 million of revenue.

Investor Verification Checklist

Confirm the requested issuer and period: the source is II-VI Incorporated FY2021, not Coherent Corp. or 2020 Q4.
Verify the subsequent status, final consideration, financing, regulatory approvals and closing of the Coherent acquisition.
Reconcile reported cash, debt, preferred-stock obligations and pro forma leverage after the acquisition.
Assess whether the FY2021 margin improvement is sustainable after normalizing for Finisar purchase-accounting effects and other unusual items.
Review customer concentration, backlog conversion, supply commitments and raw-material availability.
Evaluate potential dilution from Series A and Series B preferred stock, convertible notes and acquisition-related share issuance.
Monitor the $345 million 0.25% convertible notes, including their 2022 maturity and conversion or cash-settlement requirements.
Review COVID-19, China regulatory, trade-control, foreign-exchange and integration developments in subsequent filings.