Filing Scope and Business Context
This filing is an unaudited Form 10-Q for II-VI Incorporated, not Coherent Corp. It covers the quarter and nine months ended March 31, 2018, within the fiscal year ending June 30, 2018. The request metadata identifies “Coherent Corp.” and “2017 Q3,” which do not match the filing text.
II-VI develops and manufactures engineered materials, optoelectronic components and photonic products for industrial, optical communications, military, semiconductor equipment, automotive, consumer electronics, medical and related markets. Reportable segments are II-VI Laser Solutions, II-VI Photonics and II-VI Performance Products.
Financial Performance and Liquidity
| Metric | Three months ended March 31, 2018 | Three months ended March 31, 2017 | Nine months ended March 31, 2018 | Nine months ended March 31, 2017 |
|---|---|---|---|---|
| Revenue | $294.7 million | $245.0 million | $837.7 million | $698.3 million |
| Gross margin | $118.3 million; 40.2% | $97.7 million; 39.9% | $333.8 million; 39.8% | $279.5 million; 40.0% |
| Earnings before taxes | $31.2 million | $29.3 million | $88.0 million | $84.9 million |
| Net earnings | $30.1 million | $22.4 million | $60.8 million | $62.6 million |
| Diluted EPS | $0.45 | $0.35 | $0.93 | $0.97 |
- Quarterly revenue increased 20%; nine-month revenue increased 20%.
- Quarterly net earnings rose 34%, aided substantially by lower income tax expense. Nine-month net earnings declined 3%.
- Quarterly gross margin expanded 30 basis points, while nine-month gross margin declined 20 basis points. Management cited foreign-currency effects, production-yield challenges and inefficiencies.
- Research and development expense was $30.6 million for the quarter and $83.9 million year to date. SG&A was $53.1 million and $152.8 million, respectively.
- Operating cash flow was $113.9 million for the nine months, compared with $78.4 million in the prior-year period.
- Capital expenditures were $116.5 million; investing cash outflow was $248.2 million, including $80.5 million for the Kaiam acquisition and $51.7 million for an equity investment.
- Cash and cash equivalents were $263.2 million at March 31, 2018, versus $271.9 million at June 30, 2017. Available borrowing capacity was $236.4 million.
- Total debt obligations were $511.7 million, including $345.0 million principal amount of 0.25% convertible senior notes due 2022, $70.0 million of term debt, $90.0 million drawn on the revolving facility and other borrowings. Debt increased from $343.5 million at June 30, 2017.
- The company reported compliance with its credit-facility and Yen-facility financial covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected stronger demand across industrial optics, communications, semiconductor capital equipment, RF and power-generation markets, including demand for silicon carbide products.
- II-VI Performance Products was the strongest segment: quarterly revenue increased 30% and operating income increased 71%; nine-month revenue increased 26% and operating income increased 85%.
- II-VI Laser Solutions revenue increased 31% for the quarter and 28% year to date, but year-to-date operating income was essentially flat because of investment in the acquired Compound Semiconductor business and related research and development.
- II-VI Photonics revenue increased 7% for the quarter and 10% year to date; year-to-date operating income increased 16%, including the contribution from Integrated Photonics.
- Interest expense increased materially because of higher debt, while prior-year other income included foreign-currency gains and residual proceeds from the sale of the RF business.
- The company issued $345.0 million of convertible notes, used proceeds to repay revolving debt and repurchased approximately $49.9 million of common stock.
- Acquisitions materially changed the reporting base. Kaiam contributed $2.5 million of revenue and a $10.7 million net loss year to date; Integrated Photonics contributed $15.2 million of revenue and $2.5 million of net earnings.
- Inventory increased to $249.5 million from $203.7 million at June 30, 2017, while property, plant and equipment increased to $507.7 million from $367.7 million, reflecting substantial investment and acquisition activity.
Outlook, Unusual Items and Risks
- No specific quantitative revenue or earnings guidance is provided in the filing. Management stated that cash flow from operations, cash reserves and borrowing capacity should fund working capital, capital expenditures, debt service, research and development, share repurchases and growth objectives for the next twelve months.
- The Tax Cuts and Jobs Act produced a provisional net tax charge of $9.3 million year to date and a $6.5 million tax benefit in the quarter. The accounting remained subject to change, with finalization expected by the quarter ending December 31, 2018.
- Revenue recognition standard ASC 606 was scheduled for adoption in fiscal 2019 using the modified retrospective method. Management expected accelerated recognition for certain military-related contracts but could not yet estimate the overall impact, including the effect on commercial contracts.
- II-VI announced an intended acquisition of CoAdna for approximately $85 million net of cash acquired. Closing was expected in the first quarter of fiscal 2019 and remained subject to shareholder, regulatory and customary closing conditions.
- Key risks include international operations and foreign-currency exposure, trade restrictions and potential trade wars, supply-chain disruptions, competitive and technology changes, customer purchasing patterns, product-development execution, acquisition integration, production yields, goodwill or intangible-asset impairment, intellectual-property protection, cybersecurity, regulation and natural disasters.
- Contractual obligations totaled $815.8 million, including $511.7 million of debt, $126.4 million of operating leases, $122.8 million of purchase obligations and $23.7 million of capital-lease obligations.
- Legal proceedings were described as ordinary-course matters; management believed any resulting liabilities would not materially affect financial condition, liquidity or results of operations.
Facts Investors Should Verify
- Confirm the issuer and period: the source filing is II-VI Incorporated for the quarter ended March 31, 2018, not Coherent Corp. for “2017 Q3.”
- Assess whether the elevated capital expenditures, acquisition spending and inventory growth are generating adequate returns and operating cash flow.
- Review the economics, dilution risk and conversion conditions of the $345 million convertible notes, including the $47.06 initial conversion price.
- Monitor integration, profitability and research-and-development spending at Kaiam/II-VI Compound Semiconductor Ltd., which reported a year-to-date net loss.
- Track final Tax Act accounting and the eventual ASC 606 adoption impact on revenue, earnings and retained earnings.
- Evaluate the pending CoAdna transaction, its funding requirements and closing risks.
- Verify exposure to foreign exchange, tariffs, trade restrictions, variable interest rates, production yields and customer concentration using subsequent filings.