Business Context and Reporting Period
The filing is a Form 10-Q for II-VI Incorporated, not Coherent Corp., covering the three months ended September 30, 2013, the company’s fiscal first quarter. II-VI develops and manufactures engineered materials and opto-electronic components for industrial, optical communications, military, semiconductor, medical, consumer and thermoelectric applications.
The company operated five reporting segments after acquiring Oclaro’s Switzerland-based semiconductor laser business: Infrared Optics, Near-Infrared Optics, Military & Materials, Advanced Products Group and Active Optical Products.
Financial Results and Key Metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $151.2 million | $132.3 million | Up 14% |
| Gross profit | $56.4 million | $48.8 million | Up 16% |
| Gross margin | 37.3% | 36.9% | Up 40 basis points |
| Earnings before taxes | $12.9 million | $17.3 million | Down 25% |
| Net earnings attributable to II-VI | $9.7 million | $12.7 million | Down 24% |
| Diluted EPS | $0.15 | $0.20 | Down $0.05 |
| Operating cash flow | $24.4 million | $23.2 million | Up 5% |
- Bookings increased 25% to $143.5 million from $114.4 million.
- Research and development expense increased to $7.7 million, or 5.1% of revenue, from $5.6 million, or 4.2%.
- Selling, general and administrative expense rose to $35.1 million, or 23.2% of revenue, from $26.7 million, or 20.2%, primarily due to $3.5 million of Laser Enterprise transaction expenses.
- The effective tax rate was 25.1%, compared with 24.2%.
- Cash and cash equivalents were $195.2 million at September 30, 2013, compared with $185.4 million at June 30, 2013.
- Total debt increased to $211.1 million from $114.0 million. Available borrowing capacity increased to $117.8 million from $29.8 million.
- Inventories increased to $167.6 million from $141.9 million, while total assets increased to $999.5 million from $863.8 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected contributions from the M Cubed, Photop Advanced Coating Center and LightWorks acquisitions, higher standard-optics shipments, and the initial contribution from Laser Enterprise.
- Profit declined despite higher revenue and gross margin because of acquisition-related transaction costs, greater R&D spending, lower profitability in Photop, higher interest expense and foreign-currency losses.
- Near-Infrared Optics revenue declined 2% and segment earnings declined 60% to $3.1 million, primarily because of legacy-product price reductions during the transition from 40G to 100G networks and increased development spending.
- Military & Materials improved from a $2.1 million segment loss to $3.4 million of earnings, principally due to LightWorks and improved PRM production efficiency.
- Advanced Products Group revenue increased 64% to $26.5 million and moved from a $0.8 million loss to $0.3 million of earnings, mainly due to M Cubed and improved Marlow product mix.
- Active Optical Products contributed $4.8 million of revenue and a $4.1 million segment loss for 18 days of activity. The loss included acquisition transaction expenses.
- Investing cash outflows increased to $102.2 million, including $90.6 million for the Laser Enterprise acquisition and $5.0 million for an option to acquire another Oclaro business. Financing cash inflows increased to $87.2 million, primarily from new borrowings.
Outlook, Commentary, Risks and Unusual Items
Management stated that operating cash flow, cash reserves and available borrowing capacity were expected to fund working capital, capital expenditures and internal and external growth objectives for the following twelve months. The filing does not provide quantitative revenue or earnings guidance.
- On September 12, 2013, II-VI acquired Oclaro’s Switzerland-based semiconductor laser business for total consideration of $98.6 million, including $90.6 million paid at closing and $8.0 million of holdbacks. Purchase accounting remained preliminary.
- On November 1, 2013, after quarter-end, the company acquired Oclaro’s fiber amplifier and micro-optics business in a transaction valued at $88.6 million. The filing states that borrowing capacity immediately after the transaction was $37.8 million and debt obligations were $291.1 million.
- The amended credit facility provides a $225 million revolving facility and a $100 million term loan through September 2018. The company was in compliance with its financial covenants at September 30, 2013.
- Key risks include integration of acquired businesses, rapidly changing technology, customer and end-market demand, product acceptance, competition, pricing pressure, foreign-exchange exposure, interest-rate exposure and potential changes in market or economic conditions.
- Goodwill increased to $162.1 million, including approximately $39.0 million related to Laser Enterprise. Intangible assets increased to $117.2 million, and future amortization expense is expected to remain material.
- The LightWorks contingent earnout liability was $1.1 million at September 30, 2013, with up to $4.2 million of potential total additional payments based on 2013 performance targets.
- Foreign-currency forward contracts had a $7.3 million notional amount. A 1% increase in borrowing rates would have increased quarterly interest expense by approximately $0.4 million.
Important Facts for Investors to Verify
- Confirm the filing identity: the supplied filing is for II-VI Incorporated, whereas the request metadata names Coherent Corp.
- Assess whether the Laser Enterprise and subsequent Amplifier Business acquisitions generate sufficient revenue and profitability to offset integration costs, added amortization and substantially higher debt.
- Monitor Photop’s margin recovery during the 40G-to-100G technology transition and the impact of continued R&D investment.
- Review debt maturities, variable-rate exposure, covenant compliance and liquidity after the November 1, 2013 acquisition.
- Evaluate the quality and conversion of the $143.5 million bookings level into future revenue.
- Review the final purchase-price allocations, goodwill and intangible valuations for the acquired Oclaro businesses.
- Consider working-capital trends, particularly the $167.6 million inventory balance and the company’s foreign-held cash of approximately $153 million.