Business Context and Reporting Period
This Form 10-Q was filed by II-VI Incorporated, not Coherent Corp. The filing covers the three and six months ended December 31, 2020, representing the second quarter and first six months of fiscal 2021. II-VI develops and manufactures engineered materials, photonic components, optical communications products, compound semiconductors and related technologies for industrial, communications, consumer electronics, aerospace and defense, semiconductor equipment, life sciences and automotive markets.
The company reported two segments: Photonic Solutions and Compound Semiconductors. Finisar operations contributed $368.0 million of quarterly revenue and $705.6 million for the six-month period.
Key Financial Metrics
| Metric | Three Months Ended December 31, 2020 | Year-over-Year Change | Six Months Ended December 31, 2020 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $786.6 million | Up 18% | $1,514.7 million | Up 50% |
| Gross profit | $322.5 million | Up from $148.3 million | $609.1 million | Up from $271.4 million |
| Gross margin | 41.0% | Up from 22.3% | 40.2% | Up from 27.0% |
| Operating income | $118.7 million | Up from an $78.6 million loss | $219.8 million | Up from a $97.1 million loss |
| Net earnings | $87.9 million | Up from a $98.2 million loss | $134.2 million | Up from a $124.2 million loss |
| Net earnings available to common shareholders | $81.0 million | Up from a $98.2 million loss | $120.8 million | Up from a $124.2 million loss |
| Diluted EPS | $0.73 | Up from $(1.08) | $1.12 | Up from $(1.58) |
| Net cash from operating activities | Not separately provided for the quarter | $355.7 million | Up from $56.3 million |
Research and development expense was $84.9 million in the quarter and $163.1 million for the six months. SG&A expense was $118.9 million and $226.1 million, respectively. The year-to-date effective tax rate was 19.1%, compared with a 10.0% tax benefit in the prior-year period.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $834.5 million at December 31, 2020, compared with $493.0 million at June 30, 2020.
- Total debt was $1.471 billion, including $1.409 billion of long-term debt, versus $2.255 billion of total debt at June 30, 2020.
- The $720 million Term B Facility was repaid in full during the quarter ended September 30, 2020. Debt repayment and related costs included $24.7 million of debt issuance costs expensed.
- The company reported $448.6 million of aggregate availability under its revolving credit arrangements.
- Total assets were $5.647 billion and total shareholders’ equity was $3.237 billion at December 31, 2020.
- The company was in compliance with all financial covenants under its credit agreement.
- July 2020 equity offerings generated $883.9 million of net proceeds: approximately $460 million from common stock and $460 million from mandatory convertible preferred stock before offering costs.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected the Finisar acquisition, increased communications demand and substantially higher consumer-market product shipments.
- Gross margin improved materially because the prior-year period included $80.6 million of acquired Finisar inventory fair-value step-up costs, as well as because of favorable product mix.
- Photonic Solutions revenue increased 5% in the quarter and 63% year to date; segment operating income was $48.4 million and $98.9 million, respectively, compared with losses in the prior-year periods.
- Compound Semiconductors revenue increased 47% in the quarter and 39% year to date; segment operating income was $70.3 million and $121.0 million, respectively, driven principally by consumer-market shipments.
- Research and development expense increased year to date in absolute dollars but declined as a percentage of revenue, partly reflecting qualification of the Sherman, Texas wafer fabrication facility.
- Interest expense declined in the quarter because of lower debt balances, but six-month interest and other expense increased because of the Term B debt extinguishment costs and $12.2 million of foreign-currency losses.
- The company acquired Ascatron AB for $36.7 million and acquired the remaining 6.1% interest in INNOViON Corporation for $4.4 million. The Innovion step acquisition generated an approximately $7.0 million gain.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific quantitative revenue or earnings guidance. Management stated that existing cash, committed borrowing availability and other liquidity arrangements were expected to support working capital, capital expenditures, debt repayments and other operating requirements. Management also expected to remain in compliance with applicable financial covenants.
- COVID-19 remained a significant uncertainty, with potential effects from supply-chain and production disruptions, workforce restrictions, reduced customer spending, facility limitations, vaccine effectiveness and global economic conditions. Management stated that the ultimate impact could not reasonably be estimated.
- The company operates in competitive and rapidly changing markets and is exposed to demand volatility, technology changes, execution risks associated with acquisitions and integration, and international operating risks.
- Foreign-currency exposure includes the Japanese yen, Chinese renminbi, Swiss franc, euro and Malaysian ringgit. Six-month foreign-currency losses were $12.2 million.
- An interest-rate swap with a $1.075 billion notional amount effectively converts a portion of variable-rate debt to fixed-rate exposure. Without the hedge, a 100-basis-point rate increase would have increased interest expense by an estimated $3.1 million for the quarter and $6.4 million for the six months.
- The $345 million 0.25% convertible notes were convertible at the holders’ option during the quarter ending March 31, 2021 because the stock-price conversion threshold was met. The notes’ if-converted value was $556.9 million at December 31, 2020.
- The company had $42.3 million of gross unrecognized tax benefits, including $4.0 million of accrued interest and penalties, and disclosed ongoing tax examinations in several jurisdictions.
- Management believed pending legal and regulatory matters would not materially affect financial condition, liquidity or results of operations, although unfavorable outcomes remain possible.
Important Facts for Investors to Verify
- Confirm the issuer and period: the provided filing is II-VI Incorporated’s Form 10-Q for the quarter ended December 31, 2020, not a Coherent Corp. filing labeled “2020 Q2.”
- Assess the sustainability of the 40.2% year-to-date gross margin after excluding the prior-year Finisar inventory step-up and considering product mix and consumer-electronics demand.
- Evaluate the contribution, integration and profitability of Finisar, Ascatron and Innovion.
- Review the maturity, conversion and potential dilution implications of the convertible notes and mandatory convertible preferred stock.
- Monitor COVID-19 effects on supply chains, manufacturing capacity, customer demand and international operations.
- Reconcile reported cash of $834.5 million and revolving availability of $448.6 million against debt maturities, covenant requirements and planned capital expenditures.