Filing Overview
The supplied Form 10-Q is for II-VI Incorporated, not Coherent Corp. It covers the quarter and six months ended December 31, 2010, within fiscal 2011. Financial statements are unaudited and presented in U.S. dollars; amounts are generally in thousands except per-share data.
Business Context and Reporting Period
II-VI is a vertically integrated manufacturer of crystal-growth, optical, semiconductor, military, materials, and thermoelectric products serving industrial, telecommunications, military, aerospace, medical, and consumer markets. Reportable segments are Infrared Optics, Near-Infrared Optics, Military & Materials, and Compound Semiconductor Group.
The quarter included Photop Technologies for the full period and Max Levy Autograph, Inc. (MLA) from its December 2010 acquisition date.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2010 | Three months ended Dec. 31, 2009 | Six months ended Dec. 31, 2010 | Six months ended Dec. 31, 2009 |
|---|---|---|---|---|
| Revenue | $120.9 million | $68.8 million | $241.0 million | $134.3 million |
| Net earnings attributable to II-VI | $19.2 million | $6.0 million | $37.5 million | $12.3 million |
| Diluted EPS | $0.60 | $0.20 | $1.18 | $0.41 |
| Manufacturing gross margin | 42% | 38% | 42% | 39% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $33.0 million | $31.3 million |
Six-month pretax earnings were $48.9 million versus $15.8 million. The effective tax rate was 23.0%, compared with 22.2% in the prior-year period. Six-month contract research and development gross margin declined to 21% from 36%.
At December 31, 2010, cash and cash equivalents were $119.3 million, total debt was $3.7 million, and available borrowing capacity was $59.1 million under the unsecured credit facility. Total assets were $566.8 million and shareholders’ equity was $462.0 million.
Material Changes Versus Prior Comparable Period
- Revenue increased 76% for the quarter and 79% for the six-month period; bookings increased 71% and 62%, respectively.
- Growth reflected stronger demand across most business units, the addition of Photop, higher industrial laser activity, Joint Strike Fighter-related shipments, increased selenium and tellurium demand, and Marlow’s gesture-recognition products.
- Photop contributed approximately $31.0 million of quarterly revenue and $57.7 million of six-month revenue, as well as approximately $29.6 million and $57.6 million of bookings, respectively.
- Segment earnings increased significantly: six-month earnings rose 80% in Infrared Optics, 1,249% in Near-Infrared Optics, 90% in Military & Materials, and 812% in the Compound Semiconductor Group.
- Inventory increased to $101.0 million from $81.4 million at June 30, 2010, reflecting a planned build to support demand. This contributed to a $16.6 million operating cash use.
- Capital expenditures increased to $14.7 million from $6.7 million, and $12.8 million was used to acquire MLA.
- Selling, general and administrative expense increased in dollars but declined to 18% of quarterly revenue and 19% of six-month revenue, from 25% and 24%, respectively.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that operating cash flow, cash reserves, and available borrowing capacity should fund working capital, capital expenditures, debt payments, and internal growth for the remainder of fiscal 2011. No formal revenue or earnings guidance was provided in the filing.
- The company cited improving worldwide economic activity and demand trends but cautioned that results may be affected by economic and industry conditions, technology changes, competitors, customer demand, foreign exchange, and government program timing.
- A Title III government contract affecting Near-Infrared Optics did not receive continued fiscal 2011 funding, and timing of military orders also affected that segment.
- MLA was acquired for approximately $12.8 million net of cash acquired; its preliminary goodwill was $9.7 million and the purchase-price allocation remained subject to final valuation.
- Photop’s acquisition included potential cash earnouts of up to $12.0 million. The recorded fair value was $11.9 million, based on an assumed 100% probability of achieving targets; approximately $6.0 million was expected to be paid by March 31, 2011.
- Unrecognized tax benefits were $5.1 million, of which approximately $4.0 million would affect the effective tax rate if recognized. The company expected approximately $1.2 million to decrease within twelve months.
- A VLOC subsidiary was named in a breach-of-contract lawsuit filed December 1, 2010. No provision was recorded because the timing and outcome could not be predicted.
- Foreign currency movements produced an estimated after-tax loss of approximately $0.8 million, or $0.03 per diluted share, in the quarter. Forward contracts had a total contract value of $5.9 million at December 31, 2010.
- Management concluded that disclosure controls were effective. The assessment excluded MLA’s internal controls because the acquisition occurred shortly before period-end.
Investor Verification Points
- Confirm the issuer identity: the supplied filing is for II-VI Incorporated rather than Coherent Corp.
- Assess the sustainability of growth excluding Photop’s acquisition contribution and the impact of MLA.
- Monitor inventory growth, working-capital absorption, capital spending, and conversion of bookings into revenue.
- Review the valuation and payment probability of the Photop earnout and the final purchase-price allocation for MLA.
- Evaluate exposure to foreign exchange, government contract funding, military program timing, and commodity pricing for selenium and tellurium.
- Track the VLOC litigation, unrecognized tax benefits, and the October 2011 expiration of the credit facility.