Business Context and Reporting Period
This is II-VI Incorporated’s unaudited Form 10-Q for the fiscal quarter and nine months ended March 31, 2016, filed May 9, 2016. The supplied metadata identifies Coherent Corp. and “2015 Q3,” but the filing text clearly identifies the registrant as II-VI Incorporated and the reporting period as fiscal 2016 third quarter. The company develops and manufactures engineered materials, optoelectronic components, photonic products, and related technologies for industrial, optical communications, military, medical, semiconductor, and consumer markets.
The company operates through II-VI Laser Solutions, II-VI Photonics, and II-VI Performance Products. During the quarter, it acquired EpiWorks and ANADIGICS, with both businesses reported in II-VI Laser Solutions.
Financial Highlights
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Revenue | $205.1 million, versus $182.7 million | $585.7 million, versus $545.3 million |
| Gross margin | 37.9%, versus 36.0% | 37.6%, versus 36.1% |
| Net earnings | $14.9 million, versus $14.5 million | $51.1 million, versus $48.9 million |
| Diluted EPS | $0.24, versus $0.23 | $0.81, versus $0.78 |
| Operating cash flow | Not separately provided | $81.2 million, versus $85.7 million |
- Quarterly revenue increased 12%; nine-month revenue increased 7%.
- Quarterly bookings increased 20% to $235.5 million; nine-month bookings increased 12% to $630.4 million.
- Quarterly gross profit was $77.7 million; nine-month gross profit was $220.3 million.
- Quarterly earnings before tax were $17.4 million; nine-month earnings before tax were $61.7 million.
- The nine-month effective tax rate was 17.1%, compared with 13.6% in the prior-year period.
- Cash and cash equivalents were $187.4 million at March 31, 2016, compared with $173.6 million at June 30, 2015. Approximately $143 million was held outside the United States.
- Total debt was $262.9 million, compared with $176.0 million at June 30, 2015. Available borrowing capacity declined to $15.4 million from $116.6 million.
- Capital expenditures were $32.7 million, and acquisitions used $118.7 million during the nine months.
- Total assets were $1.22 billion and shareholders’ equity was $778.2 million at March 31, 2016.
Material Changes Versus the Prior Comparable Period
- II-VI Photonics drove growth: quarterly revenue increased 25% to $80.6 million and nine-month revenue increased 20% to $226.8 million. Operating income increased to $9.6 million from $0.6 million for the quarter and to $23.3 million from $3.1 million for the nine months.
- Laser Solutions profitability declined: quarterly operating income fell 62% to $5.4 million and nine-month operating income fell 27% to $28.8 million. The segment absorbed acquisition losses and transaction-related costs.
- Performance Products improved in the quarter: quarterly operating income increased 47% to $4.4 million, while nine-month operating income declined 4% to $10.8 million.
- Acquisition impact: EpiWorks was acquired in February 2016 for preliminary purchase consideration of $49.1 million, including a $6.0 million contingent earnout. ANADIGICS was acquired in March 2016 for approximately $75.5 million. The acquisitions contributed approximately $4.2 million of quarterly revenue but were dilutive to earnings by approximately $6.9 million, or $0.11 per diluted share, including transaction and other one-time expenses.
- Goodwill increased to $239.3 million from $195.9 million, primarily because of the acquisitions. The acquisition purchase-price allocations remained preliminary.
- Debt increased by approximately $86.9 million, primarily to fund the acquisitions. The company borrowed $121.2 million during the nine months and repaid $38.5 million.
- Prior-year nine-month results included a one-time settlement gain of approximately $7.1 million after tax, contributing to the comparatively lower 2016 growth in net earnings.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects continued investment in optical communications and data communications, including China broadband, U.S. 100G metro deployments, and data-center expansion.
- Management expects internal research and development spending as a percentage of revenue to increase as it invests in high-volume VCSEL technology.
- Management expects the historically lower margins of EpiWorks and ANADIGICS to somewhat affect future consolidated margins.
- Management believes operating cash flow, cash reserves, available borrowing capacity, and potential expansion of the revolving facility will fund working capital, capital expenditures, debt repayment, research and development, share repurchases, and growth objectives over the next 12 months.
- The company was in compliance with its credit-facility covenants at March 31, 2016. Debt maturities include $20.0 million within one year and $240.2 million during years two through three; the principal credit facility matures September 10, 2018.
- Contractual obligations totaled $359.5 million, including $262.9 million of debt, $68.6 million of operating leases, and $17.4 million of purchase obligations.
- The EpiWorks earnout liability was recorded at $6.0 million and depends on capacity, wafer output, and gross-margin targets. The acquisition accounting and fair values remained subject to finalization.
- The company recorded a $29.0 million valuation allowance against U.S. net deferred tax assets in connection with the acquisitions.
- Legal matters include the Zalewski shareholder litigation related to the ANADIGICS acquisition. Management believes the claim is without merit and does not believe a material loss is reasonably possible.
- Key risks include international operations and currency exposure, acquisition integration, competition, technology and product acceptance, supply-chain disruptions, intellectual-property protection, regulatory matters, cybersecurity incidents, impairment of goodwill or intangible assets, and economic or industry conditions.
- A 1% change in interest rates would have increased quarterly interest expense by approximately $0.4 million and nine-month interest expense by approximately $1.5 million. A 10% yen-dollar movement could have changed quarterly revenue by approximately $1.3 million to $1.5 million.
- Disclosure controls and procedures were considered effective, and no material changes to internal control over financial reporting were reported.
Most Important Facts to Verify
- Confirm the issuer and period: the filing is for II-VI Incorporated, fiscal third quarter ended March 31, 2016, not Coherent Corp. or a period labeled 2015 Q3.
- Verify the final purchase-price allocations, operating performance, and integration costs for EpiWorks and ANADIGICS.
- Monitor debt refinancing and covenant capacity given total debt of $262.9 million and only $15.4 million of reported borrowing availability.
- Assess whether II-VI Photonics’ unusually strong growth in optical communications is sustainable and whether acquisition-related losses abate.
- Review the effect of acquisitions on gross margins, goodwill, intangible assets, and deferred tax valuation allowances.
- Evaluate foreign-exchange, interest-rate, customer-demand, supply-chain, and international-market risks.
- Check subsequent filings for developments in the Zalewski litigation, earnout payments, tax examinations, and the company’s share-repurchase program.