II-VI Incorporated Form 10-Q Summary
Reporting period: Three and six months ended December 31, 2011, filed February 8, 2012. The supplied filing is for II-VI Incorporated, not Coherent Corp.; this issuer discrepancy should be verified.
Business Context
II-VI is a vertically integrated manufacturer of optical, electro-optical, semiconductor, materials, thermoelectric and related products serving industrial, optical communications, military, aerospace, medical and high-power electronics markets. Its four reportable segments are Infrared Optics, Near-Infrared Optics, Military & Materials, and Advanced Products Group.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Six months ended Dec. 31, 2011 | Six months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Revenue | $126.8 million | $120.9 million | $265.1 million | $241.0 million |
| Gross margin | 34.3% | 41.4% | 37.1% | 41.2% |
| Net earnings | $13.5 million | $19.3 million | $32.2 million | $37.7 million |
| Net earnings attributable to II-VI | $13.3 million | $19.2 million | $31.9 million | $37.5 million |
| Diluted EPS | $0.21 | $0.30 | $0.50 | $0.59 |
| Cash flow from operations | Not separately provided | Not separately provided | $42.9 million | $33.0 million |
At December 31, 2011, cash and cash equivalents were $123.8 million, total debt was $20.9 million, and available borrowing capacity was $32.1 million. Total assets were $678.5 million and shareholders’ equity was $563.5 million. Inventory was $142.6 million, up from $126.4 million at June 30, 2011.
Six-month investing cash outflows were $69.2 million, including $46.1 million for the acquisition of Aegis and $23.1 million of capital expenditures. The company expects operating cash flow, cash reserves and available borrowing capacity to fund fiscal 2012 working capital, capital expenditures and debt obligations.
Material Changes Versus Prior Comparable Period
- Six-month revenue increased 10.0%; quarterly revenue increased 4.9%.
- Six-month net earnings attributable to II-VI declined 15.1%, while quarterly earnings declined approximately 30.6%.
- Gross margin declined 700 basis points for the quarter and 410 basis points for the six-month period.
- Bookings declined 12.9% for the quarter to $116.9 million but were broadly flat for six months at $247.1 million.
- Internal research and development increased to $10.2 million for six months from $7.2 million, primarily reflecting investment in Photop and Aegis.
- SG&A increased to $51.0 million for six months from $44.7 million.
- Operating cash flow increased to $42.9 million from $33.0 million despite lower earnings, supported by noncash charges and working-capital management.
- Aegis was acquired in July 2011 for approximately $46.1 million net of cash acquired. Aegis contributed $7.8 million of revenue and incurred a $1.7 million net loss during the six months ended December 31, 2011.
Segment Performance and Management Commentary
- Infrared Optics: Six-month revenue increased 19% to $97.6 million and segment earnings increased 32% to $23.8 million, driven by higher laser utilization and HIGHYAG demand.
- Near-Infrared Optics: Six-month revenue decreased 1% to $77.6 million and segment earnings decreased 77% to $3.4 million. Results were affected by Aegis losses and Thailand flood-related disruption at contract manufacturer Fabrinet, lower Photop margins and weaker VLOC military-related activity.
- Military & Materials: Six-month revenue increased 20% to $47.4 million, but segment earnings declined 64% to $2.6 million. The decline reflected a $2.2 million tellurium inventory write-down, compressed tellurium margins and a bad-debt provision related to a photovoltaic customer bankruptcy.
- Advanced Products Group: Six-month revenue increased 4% to $42.6 million and segment earnings increased 4% to $7.5 million, although quarterly bookings fell 46% because of delayed government-contract funding and customer order delays.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide quantified revenue or earnings guidance. Management cited economic uncertainty, delayed and smaller customer orders, European and Asian demand softness, optical communications inventory correction, photovoltaic-market weakness, military budget uncertainty and delays in Department of Energy and Department of Defense contracts.
- Quarterly results included an after-tax $2.2 million tellurium inventory write-down and an after-tax $0.7 million impairment charge related to damaged Aegis machinery, equipment and inventory following the Thailand flooding.
- Favorable tax items partly offset these charges, including a $1.3 million benefit from preferential Chinese tax treatment and a $0.7 million benefit from reversal of an uncertain-tax-position liability.
- The six-month effective tax rate was 20.0%, compared with 23.0% in the prior-year period.
- Goodwill increased to $84.8 million, including $20.0 million from Aegis; the Aegis purchase-price allocation remained preliminary.
- The company had $3.7 million of gross unrecognized tax benefits at December 31, 2011 and expects approximately $0.9 million to decrease within twelve months.
- Key risks include catastrophic events and supply-chain disruptions, foreign-currency exposure, tellurium-price volatility, customer concentration and demand changes, contract funding delays, goodwill impairment, inventory valuation and tax-position uncertainty.
- The company was in compliance with all credit-facility covenants. The facility is a $50.0 million unsecured line, expandable under certain conditions to $80.0 million, and matures in June 2016.
Most Important Facts to Verify
- Confirm the issuer identity: the source filing identifies II-VI Incorporated, while the request metadata identifies Coherent Corp.
- Assess whether Aegis can recover from the Thailand-related manufacturing disruption and whether the preliminary acquisition accounting will change.
- Monitor tellurium prices, inventory exposure and potential additional margin or valuation effects at PRM.
- Evaluate whether Photop’s product-mix pressure and optical communications inventory correction are temporary or structural.
- Track bookings, especially the sharp quarterly declines in Advanced Products and overall bookings.
- Review liquidity after the Aegis acquisition and capital expenditures, including the $32.1 million remaining credit availability and $20.9 million of debt.
- Consider the effect of unusual tax benefits and operational charges when comparing normalized earnings.