Business Context and Reporting Period
The filing is an unaudited Form 10-Q for II-VI Incorporated, not Coherent Corp. It covers the three and nine months ended March 31, 2012, the third quarter of fiscal 2012, with comparisons to the corresponding 2011 periods. II-VI develops and manufactures optical, electro-optical, semiconductor, materials, thermoelectric and related products serving industrial, optical communications, military, aerospace, medical and other markets.
The company reported four segments: Infrared Optics, Near-Infrared Optics, Military & Materials, and Advanced Products Group.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2012 | Three Months Ended March 31, 2011 | Nine Months Ended March 31, 2012 | Nine Months Ended March 31, 2011 |
|---|---|---|---|---|
| Revenue | $132.6 million | $130.0 million | $397.7 million | $371.0 million |
| Gross margin | 34.7% | 40.7% | 36.3% | 41.0% |
| Earnings before taxes | $19.2 million | $27.1 million | $59.5 million | $76.0 million |
| Net earnings attributable to II-VI | $14.0 million | $23.1 million | $45.9 million | $60.6 million |
| Diluted EPS | $0.22 | $0.36 | $0.71 | $0.95 |
| Operating cash flow | Not separately provided | Not separately provided | $57.7 million | $59.7 million |
Bookings increased 2.0% year over year to $145.8 million in the quarter and 1.0% to $392.9 million for the nine-month period. Company-funded research and development increased to $5.7 million, or 4.3% of revenue, in the quarter and $15.9 million, or 4.0% of revenue, year to date.
At March 31, 2012, cash and cash equivalents were $119.3 million, total assets were $687.5 million, and total shareholders’ equity was $581.8 million. Total debt was $13.6 million, down from $18.7 million at June 30, 2011. Available borrowing capacity was $41.5 million, and the company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased 2.0% for the quarter and 7.2% for the nine-month period, but diluted EPS declined 39% for the quarter and 25% year to date.
- Gross margin contracted by 600 basis points in the quarter and 470 basis points year to date, primarily because of tellurium inventory write-downs, lower tellurium margins, unfavorable product mix and Aegis-related costs.
- The Military & Materials segment recorded tellurium inventory lower-of-cost-or-market adjustments of $3.8 million in the quarter and $6.5 million year to date. Management identified approximately $3.6 million and $6.1 million of after-tax earnings impact, respectively.
- Near-Infrared Optics earnings declined 52% in the quarter and 71% year to date, reflecting Aegis operating losses and manufacturing disruption following flooding in Thailand, weaker VLOC shipments and lower-margin Photop product mix.
- Advanced Products Group bookings declined 40% in the quarter and 29% year to date, primarily because of delayed WBG blanket orders, lower gesture-recognition demand and delays in government defense funding.
- Infrared Optics was the strongest segment, with quarterly revenue up 5% and segment earnings up 9%; nine-month revenue rose 14% and segment earnings rose 23%.
- The company acquired Aegis Lightwave in July 2011 for approximately $46.1 million net of cash acquired. Aegis contributed $11.5 million of revenue and a $2.2 million net loss during the nine months ended March 31, 2012.
- Investing cash use increased to $77.0 million, including $46.1 million for the Aegis acquisition and $32.8 million of capital expenditures.
Outlook, Risks, Contingencies and Unusual Items
- Management cited strengthening order trends in Infrared Optics and Photop and expected cash flow, cash reserves and borrowing capacity to fund working capital, capital expenditures, debt payments and internal growth for the next twelve months.
- Tellurium prices remain a significant risk. A further decline in the global tellurium index price would require additional inventory write-downs and could materially adversely affect earnings and financial condition.
- Aegis continued to operate below full manufacturing capacity after Thailand flooding damaged its contract manufacturer. The company was investing in restoring capacity and developing optical communications products for 40G and 100G applications.
- The effective tax rate increased to 21.9% from 19.9% because earnings shifted toward higher-tax jurisdictions. Changes in geographic earnings mix could materially affect future tax expense.
- The company sold its 40% interest in Haobo for $5.5 million, consisting of $1.9 million in cash and a $3.6 million note receivable, and recognized a $1.0 million gain. It also recognized a $1.4 million gain on the sale of precious-metals inventory during the nine-month period.
- The $6.0 million contingent earnout related to Photop was paid during March 2012, eliminating the related recorded liability.
- Contractual obligations totaled $91.3 million, including $42.8 million of operating leases, $34.3 million of purchase obligations and $13.6 million of debt principal.
- Foreign-exchange exposure is concentrated in the Japanese yen. The company uses forward contracts and estimated that a 10% yen-to-dollar change could affect quarterly revenue by approximately negative $0.5 million to positive $1.3 million.
- Management stated that disclosure controls and procedures were effective as of March 31, 2012, with no materially affecting changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the issuer and period: the supplied filing is for II-VI Incorporated for the quarter ended March 31, 2012, despite the request identifying Coherent Corp. and “2011 Q3.”
- Assess whether tellurium prices have stabilized and whether additional inventory write-downs or margin pressure occurred after March 31, 2012.
- Evaluate Aegis integration, restoration of Thailand manufacturing capacity, acquisition accounting and the sustainability of Aegis-related revenue and losses.
- Review segment trends, particularly the sharp deterioration in Near-Infrared Optics and Advanced Products Group bookings and earnings.
- Reconcile operating cash flow with capital expenditures, acquisition spending, debt repayments and the decline in cash balances.
- Monitor debt covenant compliance, available borrowing capacity, variable-rate exposure and the geographic location and repatriation implications of cash balances.
- Review tax examinations, the $3.0 million of unrecognized tax benefits and the effect of future changes in geographic earnings mix.