Business Context and Reporting Period
This filing is II-VI Incorporated’s Form 10-K for the fiscal year ended June 30, 2022, filed August 29, 2022. The provided metadata references Coherent Corp. and “2021 Q4,” but the filing is for II-VI Incorporated and does not report Coherent’s results for the fiscal year. Coherent was acquired on July 1, 2022, immediately after the reporting period, and its results begin in fiscal 2023.
II-VI develops and manufactures engineered materials, optoelectronic components, devices and related systems for communications, industrial, aerospace and defense, consumer electronics, semiconductor capital equipment, life sciences and automotive markets. Fiscal 2022 reporting segments were Photonic Solutions and Compound Semiconductors; following the acquisition, the company planned to report Materials, Networking and Lasers segments.
Key Financial Metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $3.317 billion | $3.106 billion | +7% |
| Gross profit | $1.265 billion | $1.177 billion | +7% |
| Gross margin | 38.0% | 37.8% | +20 basis points |
| Operating income | $414 million | $402 million | +3% |
| Earnings before taxes | $282 million | $353 million | -20% |
| Net earnings | $235 million | $298 million | -21% |
| Diluted EPS | $1.45 | $2.37 | -39% |
| Cash flow from operations | $413 million | $574 million | -28% |
| Capital expenditures | $314 million | $146 million | +$168 million |
| Research and development | $377 million | $330 million | +14% |
Net earnings available to common shareholders were $167 million after $68 million of preferred stock dividends. Basic EPS was $1.57 versus $2.50 in the prior year.
- Revenue mix: Communications revenue was $2.203 billion, industrial revenue was $411 million, aerospace and defense revenue was $185 million, consumer revenue was $230 million, and semiconductor revenue was $151 million.
- Segment performance: Photonic Solutions revenue increased 9% to $2.226 billion and operating income increased 11% to $230 million. Compound Semiconductors revenue increased 2% to $1.090 billion, while operating income was essentially flat at $220 million.
- Liquidity: Cash, cash equivalents and restricted cash were $2.582 billion at June 30, 2022, including $990 million of restricted proceeds from the senior notes offering.
- Debt: Consolidated debt was $2.300 billion at June 30, 2022, compared with $1.375 billion a year earlier. The company had $450 million of available revolving credit capacity at June 30, 2022.
- Balance sheet: Total assets were $7.845 billion, total liabilities were $3.462 billion, and shareholders’ equity was $3.616 billion. Inventories increased to $903 million from $696 million.
- Backlog and bookings: Fiscal 2022 bookings were approximately $4.3 billion versus $3.3 billion in fiscal 2021. Backlog was approximately $2.3 billion at June 30, 2022 versus $1.3 billion a year earlier.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by communications, semiconductor capital equipment and industrial applications. Communications revenue increased approximately 7%, semiconductor capital equipment revenue increased 29%, and industrial revenue increased 26%.
- Consumer revenue declined 20%, or $56 million, primarily because of lower 3D-sensing sales.
- Gross margin improved modestly despite supply-chain pressures. Compound Semiconductors operating margin declined because of a $53 million increase in research and development spending and higher supply-chain costs.
- Interest and other expense increased to $132 million from $50 million. Interest expense was $121 million, including financing costs incurred in preparation for the Coherent acquisition, and foreign-currency losses were $16 million.
- Operating cash flow declined because of lower earnings and increased working capital, including a $231 million inventory investment intended to support business continuity and expected growth.
- Capital expenditures more than doubled to $314 million as the company expanded manufacturing capacity.
- The company issued $990 million of 5.0% senior notes due 2029 in December 2021. The proceeds were restricted until the Coherent transaction closed.
- On July 1, 2022, II-VI completed the Coherent acquisition for estimated consideration of approximately $7.1 billion, including $2.1 billion of net cash outflow and 23 million II-VI shares issued. The acquisition was financed with new debt, preferred stock, cash and other sources.
Guidance, Outlook, Commentary and Risks
The filing does not provide specific fiscal 2023 revenue or earnings guidance. Management stated that existing cash, operating cash flow and borrowing capacity were expected to fund working capital, capital expenditures, scheduled debt obligations, research and development and growth objectives through at least fiscal 2023, although this assessment predates the full operating integration of Coherent.
- Management highlighted strong demand for higher-speed datacom and transceiver products, continued growth opportunities in industrial and semiconductor capital equipment markets, and investments in silicon carbide, indium phosphide, gallium arsenide and other emerging technologies.
- The principal near-term event is the integration of Coherent, including expected transaction and severance expenses of approximately $87 million in the first quarter of fiscal 2023. Purchase accounting remained incomplete at filing, and goodwill and intangible-asset allocations could be material.
- Immediately after closing, consolidated indebtedness was approximately $5.0 billion, including $850 million of Term Loan A, $2.8 billion of Term Loan B and $990 million of senior notes. The company also had a $350 million undrawn revolving facility.
- New credit facilities impose leverage and interest-coverage requirements, including an initial maximum total net leverage ratio of 5.25-to-1.00 and a minimum interest-coverage ratio of 2.50-to-1.00, subject to the agreement’s terms.
- Key risks include acquisition integration, substantially higher leverage and variable interest rates, supply shortages and transportation disruption, customer concentration, cyclical demand, foreign-exchange volatility, export controls and trade restrictions, COVID-19 effects, the Russia-Ukraine conflict, technological obsolescence, product defects, cybersecurity, environmental compliance and potential goodwill impairment.
- Russia’s invasion of Ukraine affected logistics and availability of certain gases used in laser products. The company had obtained alternative sources but warned that further supply or energy disruptions could adversely affect manufacturing and costs.
- The company had approximately $704 million of vendor purchase commitments and approximately $171 million of operating lease obligations at June 30, 2022. No material off-balance-sheet arrangements were reported.
- Legal proceedings were described as ordinary-course matters, and management believed any ultimate liabilities would not materially affect financial condition, liquidity or results of operations. Internal control over financial reporting was reported effective, with an unqualified auditor opinion.
Important Facts for Investors to Verify
- Confirm that the applicable investment period is II-VI’s fiscal year ended June 30, 2022, rather than Coherent’s 2021 fourth quarter.
- Review fiscal 2023 filings for Coherent’s acquired revenue, margins, purchase-price allocation, goodwill, intangible assets and integration costs.
- Assess post-acquisition leverage, interest expense, refinancing needs and compliance with the new credit agreement’s leverage and interest-coverage covenants.
- Reconcile the reported June 30 cash balance with the $2.1 billion cash outflow used to close the Coherent acquisition on July 1, 2022.
- Monitor working-capital requirements, inventory levels, capital expenditures and supply-chain normalization.
- Evaluate dilution from the 23 million shares issued for the acquisition, mandatory convertible preferred stock, Series B preferred stock and outstanding convertible notes.
- Verify the sustainability of communications growth and the recovery outlook for consumer and 3D-sensing demand.
- Review exposure to export controls, China-related trade restrictions, foreign currencies, commodity prices and geopolitical disruptions.