II-VI Incorporated Form 10-Q Summary
Filing-period note: The supplied filing is for II-VI Incorporated, not Coherent Corp. It covers the quarter and six months ended December 31, 2015, II-VI’s fiscal 2016 second quarter. Financial statements are unaudited and presented under U.S. GAAP.
Business Context and Reporting Period
II-VI develops and manufactures engineered materials, optical components, lasers, opto-electronic modules and related products for industrial, optical communications, military, medical, semiconductor and consumer markets. Reportable segments are II-VI Laser Solutions, II-VI Photonics and II-VI Performance Products.
The company reported increased demand in optical communications, particularly from China’s broadband buildout and undersea communications networks. Military-related and semiconductor capital-equipment demand remained weaker.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2015 | Prior Year | Six Months Ended Dec. 31, 2015 | Prior Year |
|---|---|---|---|---|
| Revenue | $191.4 million | $176.7 million | $380.6 million | $362.6 million |
| Gross margin | 37.3% | 35.7% | 37.5% | 36.1% |
| Earnings before taxes | $22.2 million | $24.8 million | $44.3 million | $41.3 million |
| Net earnings | $19.0 million | $22.1 million | $36.2 million | $34.4 million |
| Diluted EPS | $0.30 | $0.35 | $0.58 | $0.55 |
| Operating cash flow | Not separately provided | Not separately provided | $62.3 million | $49.4 million |
Six-month bookings increased 7% to $394.9 million; quarterly bookings increased 11% to $207.7 million. The six-month effective tax rate was 18.3%, compared with 16.4% in the prior-year period. Gross margin benefited from higher revenue, product mix and restructuring savings, as well as approximately $0.7 million of insurance proceeds related to prior-year flooding in China.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $177.1 million at December 31, 2015, compared with $173.6 million at June 30, 2015.
- Six-month capital expenditures were $19.2 million, down from $31.6 million in the prior-year period.
- Debt totaled $146.5 million, down from $176.0 million at June 30, 2015. The balance included $89.0 million under a revolving line, $55.0 million of term debt and $2.5 million under a yen-denominated facility.
- Available borrowing capacity was $136.1 million, net of applicable reductions, compared with $116.6 million at June 30, 2015. Outstanding letters of credit totaled $1.5 million.
- The company repaid $29.5 million of borrowings, repurchased $6.3 million of stock and ended the period with a $3.5 million increase in cash.
- Management stated that operating cash flow, cash reserves and available borrowing capacity should fund working capital, capital expenditures, share repurchases, acquisitions and growth objectives for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 8% and six-month revenue increased 5%, primarily due to II-VI Photonics.
- Quarterly net earnings declined 14%, while six-month net earnings increased 5%. The prior-year periods benefited from a one-time acquisition-related settlement gain of approximately $7.1 million after tax, or $0.11 per diluted share.
- Quarterly and six-month gross margins improved by 160 and 140 basis points, respectively.
- II-VI Photonics six-month revenue increased 17% and operating income increased to $13.7 million from $2.5 million, driven by China broadband demand, undersea networks, higher-margin 980nm pumps and new products.
- II-VI Laser Solutions six-month revenue increased 1%, but operating income declined 7% due primarily to higher allocated corporate and compensation costs and capacity ramp-up expenses.
- II-VI Performance Products six-month revenue declined 5% and operating income declined 23%, reflecting weaker semiconductor capital-equipment, military and rare-earth product demand.
- Foreign currency translation reduced accumulated other comprehensive income by $13.6 million during the six months, leaving accumulated other comprehensive loss of $4.8 million.
Outlook, Risks, Contingencies and Unusual Items
- Management expected normalized internal research and development expense to approximate 7% of revenue for the remainder of fiscal 2016.
- On February 1, 2016, the company completed its acquisition of EpiWorks for approximately $43 million in cash, with up to $6 million of potential earn-outs. The acquisition was funded through a $43 million revolving-credit borrowing.
- The company announced a proposed Anadigics acquisition for approximately $61 million, subject to the tender offer and other conditions, with expected closing in March 2016. The company indicated it could fund the transaction with cash or available borrowing capacity.
- A shareholder class action related to the proposed Anadigics transaction named Anadigics, II-VI and its acquisition subsidiary as defendants. Management considered the claim without merit and did not believe a material loss was reasonably possible.
- Key disclosed risks include international operations and currency exposure, rapidly changing technology, product acceptance, acquisition integration, impairment of goodwill or intangible assets, economic and industry conditions, intellectual-property protection, regulation, cybersecurity, supply-chain disruption, competition, customer purchasing patterns and catastrophic events.
- Foreign-currency forward contracts had a total notional amount of $8.7 million. A 10% yen-dollar movement was estimated to affect quarterly revenue by approximately negative $1.1 million to positive $1.3 million.
- Total contractual obligations were $220.4 million, including $146.5 million of debt, $59.1 million of operating leases and $9.3 million of purchase obligations. Gross unrecognized tax benefits totaled $5.1 million.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Investor Verification Checklist
- Confirm the issuer identity: the supplied filing is II-VI Incorporated, despite the request metadata naming Coherent Corp.
- Assess whether optical-communications bookings and China broadband demand are sustainable and how dependent results are on the II-VI Photonics segment.
- Review the funding, purchase-price allocation and integration risks for the EpiWorks acquisition and the proposed Anadigics acquisition.
- Reconcile reported earnings growth excluding the prior-year one-time settlement gain.
- Monitor military, semiconductor capital-equipment and rare-earth demand affecting II-VI Performance Products.
- Evaluate currency, interest-rate and refinancing exposure, including the September 2018 Credit Facility maturity and required term-loan repayments.
- Review the company’s subsequent filings for final Anadigics transaction terms, acquisition accounting, financing and litigation developments.