Business Context and Reporting Period
The source text is II-VI Incorporated’s Form 10-K for the fiscal year ended June 30, 2020, filed August 26, 2020. It does not appear to be a Coherent Corp. filing or a 2019 Q4 filing; investors should verify the company and reporting period. II-VI develops engineered materials, optoelectronic components, devices, and subsystems serving optical communications, industrial materials processing, aerospace and defense, consumer electronics, semiconductor capital equipment, life sciences, and automotive markets. Reporting segments were Photonic Solutions and Compound Semiconductors.
II-VI completed its acquisition of Finisar Corporation on September 24, 2019. Finisar results were included from the acquisition date, with segment allocation beginning October 1, 2019.
Key Financial Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Revenue | $2.380 billion | $1.362 billion | +75% |
| Gross profit | $819.6 million | $521.3 million | +57% |
| Gross margin | 34.4% | 38.3% | Down 380 basis points |
| Operating income | $39.5 million | $148.7 million | Down 73% |
| Loss before income taxes | $63.9 million | Income of $128.8 million | Material deterioration |
| Net earnings (loss) | $(67.0) million | $107.5 million | Turned to loss |
| Diluted EPS | $(0.79) | $1.63 | Turned to loss |
| Cash flow from operations | $297.3 million | $178.5 million | +67% |
| Capital expenditures | $136.9 million | $137.1 million | Approximately flat |
| Cash and equivalents | $493.0 million | $204.9 million | +141% |
| Total debt | $2.255 billion | $467.0 million | Substantially higher |
Finisar contributed $938.4 million of revenue and $94.6 million of net loss, including $47.4 million of amortization and $26.1 million of severance, restructuring, and related expense. The acquisition also generated an $87.7 million inventory fair-value step-up charge in cost of goods sold and $44.4 million of acquisition-related costs in selling, general and administrative expense.
Fiscal 2020 bookings were approximately $2.7 billion versus $1.4 billion in fiscal 2019. Backlog was approximately $957 million at June 30, 2020, versus $500 million at June 30, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue growth was primarily acquisition-driven, with additional demand in optical communications, 5G-related networks, SiC products, aerospace and defense, and 3D sensing.
- Photonic Solutions revenue increased 141% to $1.537 billion, but operating income fell 39% to $49.9 million because of acquisition-related amortization, inventory step-up costs, and other integration expenses.
- Compound Semiconductors revenue increased 13% to $821.2 million, while operating income declined 24% to $62.3 million due largely to Finisar-related costs and unabsorbed costs at the Sherman, Texas wafer facility.
- Research and development expense increased to $339.1 million, or 14.2% of revenue, from $139.2 million, or 10.2%, reflecting investments in 5G, 3D sensing, indium phosphide, LiDAR, and other emerging technologies.
- Interest and other expense increased to $103.4 million from $19.8 million, primarily because of acquisition-related borrowings, foreign currency losses, debt extinguishment costs, and a $5.0 million investment impairment.
- Total assets increased to $5.235 billion from $1.954 billion, including goodwill of $1.239 billion and other intangible assets of $758.4 million at June 30, 2020.
Liquidity, Debt, Outlook, and Risks
At June 30, 2020, II-VI had $493.0 million of cash, $374.6 million of available revolving credit capacity, and $2.255 billion of total debt. The senior credit facilities had aggregate commitments of $2.425 billion and required compliance with interest coverage and leverage covenants. The company reported compliance with all financial covenants at year-end. A $1.075 billion interest-rate swap hedged part of the variable-rate debt exposure.
Subsequent to year-end, the company completed common stock and mandatory convertible preferred stock offerings that generated approximately $920 million of gross proceeds. On July 7, 2020, it used proceeds to repay approximately $715 million of remaining Term B debt. The remainder was intended for investments, acquisitions, and general corporate purposes. On August 20, 2020, the company completed its acquisition of Ascatron AB to expand its silicon-carbide platform.
Management stated that cash, operating cash flow, borrowing capacity, and the equity raise were expected to fund working capital, capital expenditures, debt repayments, research and development, and growth objectives through at least fiscal 2021. Management could not reasonably estimate the ultimate financial impact of COVID-19. Approximately 45% of global facilities were subject to government orders at the reporting date, including approximately 10% that were closed, and the company experienced production delays from raw-material shortages.
Principal risks include COVID-19 and global economic weakness, integration and realization of Finisar synergies, high leverage and refinancing requirements, restrictive debt covenants, cyclical demand, customer concentration, international operations and foreign exchange, tariffs and export restrictions including restrictions involving Huawei, supply-chain and manufacturing-yield constraints, product defects and warranty exposure, intellectual-property litigation, cybersecurity, regulatory compliance, and impairment of goodwill or acquired intangible assets.
The company did not pay common-stock dividends and did not expect to do so in the foreseeable future. The Series A Mandatory Convertible Preferred Stock carries a 6.00% annual dividend rate on a $200 liquidation preference, payable when declared and subject to the terms of the financing arrangements.
Most Important Facts to Verify
- Confirm that the intended filing is II-VI Incorporated’s fiscal 2020 Form 10-K, rather than Coherent Corp.’s 2019 Q4 filing; the supplied source is inconsistent with the request metadata.
- Separate Finisar’s contribution and acquisition-related charges from the underlying operating performance when assessing revenue growth, margins, and earnings.
- Review the post-year-end equity offering and the repayment of approximately $715 million of Term B debt, including the resulting dilution and pro forma leverage.
- Assess the sustainability of the $957 million backlog and $2.7 billion bookings amid COVID-19, trade restrictions, customer concentration, and cyclical end markets.
- Evaluate goodwill and acquired intangible-asset exposure, particularly the $919.2 million of Finisar goodwill and the assumptions supporting expected synergies.
- Review debt maturities, convertible-note terms, covenant thresholds, interest-rate exposure, and available liquidity after the July 2020 debt repayment.
- Note that management’s internal-control assessment excluded Finisar, which represented approximately $3.1 billion of assets and $938.4 million of revenue at June 30, 2020; the external auditor nevertheless issued an unqualified opinion on internal control over financial reporting.