II-VI Incorporated Form 10-K Summary
Filing-period clarification: The supplied filing is for II-VI Incorporated, not Coherent Corp., and covers the fiscal year ended June 30, 2011. The request metadata identifies “2010 Q4,” but the filing is an annual Form 10-K; quarterly data for the quarter ended June 30, 2011 are included below.
Business Context and Reporting Period
II-VI develops and manufactures advanced materials, optical components, laser products, thermoelectric systems and silicon carbide substrates for industrial, military, telecommunications, photovoltaic, medical and aerospace applications. Reportable segments were Infrared Optics, Near-Infrared Optics, Military & Materials, and the Compound Semiconductor Group. Approximately 59% of fiscal 2011 revenue came from customers outside the United States.
The company acquired Max Levy Autograph, Inc. in December 2010 for approximately $12.8 million, including cash acquired. Photop Technologies, acquired in January 2010, contributed a full year of results in fiscal 2011. After year-end, in July 2011, the company acquired Aegis Lightwave for approximately $54.5 million in cash, including working capital and debt adjustments; Aegis results were not included in fiscal 2011.
Financial Performance and Key Metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Revenue | $502.8 million | $345.1 million | +46% |
| Net earnings attributable to II-VI | $82.7 million | $38.6 million | +114% |
| Diluted EPS | $1.30 | $0.63 | +106% |
| Bookings | $520.2 million | $387.6 million | +34% |
| Backlog at year-end | $176 million | $157 million | +12% |
| Manufacturing gross margin | $204.5 million; 42% | $131.7 million; 39% | Improved |
| Effective tax rate | 18.4% | 24.5% | Improved |
| Cash flow from operations | $73.5 million | $72.4 million | +1% |
| Capital expenditures | $40.9 million | $13.8 million | +195% |
| Cash and equivalents | $149.5 million | $108.0 million | +38% |
| Total debt | $18.7 million | $3.4 million | Increased |
Fiscal 2011 earnings growth reflected the full-year contribution from Photop, higher shipment volumes, improved yields, operating efficiencies, favorable product mix and foreign-currency gains. Other income was $3.1 million, compared with $0.3 million of other expense in fiscal 2010. Net earnings attributable to II-VI represented approximately 16.4% of revenue.
Working capital increased materially, particularly inventories, which rose to $126.4 million from $81.4 million, as the company built inventory to support demand and absorbed higher selenium and tellurium prices. Working capital was $304.6 million at June 30, 2011, compared with $215.1 million a year earlier. Shareholders’ equity increased to $523.1 million from $410.9 million.
Segment Results
| Segment | 2011 Revenue | Revenue Change | 2011 Segment Earnings | Earnings Change |
|---|---|---|---|---|
| Infrared Optics | $180.8 million | +34% | $46.2 million | +88% |
| Near-Infrared Optics | $159.8 million | +81% | $24.1 million | +96% |
| Military & Materials | $83.4 million | +27% | $15.3 million | +65% |
| Compound Semiconductor Group | $78.7 million | +41% | $13.2 million | +141% |
Infrared Optics benefited from stronger industrial laser demand, aftermarket activity and higher production volumes. Near-Infrared Optics benefited mainly from Photop, although VLOC experienced lower military shipments and a $1.0 million customer-dispute charge. Military & Materials benefited from stronger selenium and tellurium demand and pricing, as well as sapphire-window shipments. Compound Semiconductor growth was driven by gesture-recognition products, defense and medical demand, and silicon carbide acceptance.
Cash Flow, Debt and Liquidity
- Operating cash flow was $73.5 million, substantially offsetting $52.5 million of investing cash outflows.
- Investing outflows included $40.9 million of capital expenditures, $12.8 million for the MLA acquisition and $1.2 million of investments in unconsolidated businesses.
- Financing activities provided $19.2 million, including $15.0 million of long-term borrowings, $6.2 million from stock-option exercises and $4.1 million of excess tax benefits, partly offset by a $6.0 million Photop earnout payment.
- The company had a new $50.0 million unsecured revolving credit facility, expandable to $80.0 million under certain conditions, maturing in June 2016. Available capacity was $34.1 million at year-end, after letters of credit.
- Debt consisted of a $15.0 million U.S.-dollar borrowing and a $3.7 million Japanese yen term note due in June 2012. The company was in compliance with financial covenants.
- Management stated that operating cash flow, cash reserves and available borrowing capacity were sufficient for fiscal 2012 working capital, capital expenditures and growth needs. The subsequent Aegis acquisition used approximately $54.5 million of cash.
Material Changes Versus the Prior Comparable Period
- Revenue increased 46%, while net earnings attributable to II-VI more than doubled.
- Gross margin improved from 39% to 42%, reflecting volume, pricing, mix, yields and overhead absorption.
- Photop revenue increased from $46.9 million for six months in fiscal 2010 to $118.6 million for the full fiscal 2011 year.
- Capital expenditures increased substantially as management expanded manufacturing capacity.
- Debt increased to fund growth and prepare for the Aegis acquisition, while cash nevertheless increased by $41.4 million.
- International revenue rose to $309.5 million from $172.6 million, with China revenue increasing to $128.1 million from $53.8 million.
- The company declared and completed a two-for-one stock split in June 2011; all share and per-share data were restated.
Fourth-Quarter Fiscal 2011 Data
For the quarter ended June 30, 2011, revenue was $131.8 million, net earnings were $22.2 million, net earnings attributable to II-VI were $22.0 million, basic EPS was $0.35 and diluted EPS was $0.34. The filing does not present a separate quarterly cash-flow statement.
Outlook, Risks and Unusual Items
Management expected continued demand recovery and planned further manufacturing-capacity investments in fiscal 2012. The Aegis acquisition was expected to add momentum in high-speed telecommunications, but its purchase-price allocation was incomplete at the filing date and its fiscal 2011 results were excluded. The company also disclosed approximately $0.8 million of after-tax Aegis transaction costs in its fiscal 2011 discussion; the subsequent-events note describes approximately $0.8 million of pre-tax costs.
- Demand is exposed to cyclical industrial, telecommunications and capital-equipment markets.
- Approximately 23% of fiscal 2011 revenue was related to defense customers, creating exposure to U.S. budget reductions, program delays and cancellations.
- Government-funded research and development was expected to decline in the near term because of budget constraints.
- The company relies on complex manufacturing processes and limited external sources for certain materials, including ZnSe, ZnS, hydrogen selenide and thorium fluoride.
- Commodity prices for selenium, tellurium and other materials can affect margins and financial results.
- International operations create currency, political, regulatory, export-control, tax and supply-chain risks. The company uses forward contracts primarily to manage Japanese yen exposure.
- Goodwill and indefinite-lived intangible assets totaled approximately $73.9 million at year-end and are subject to impairment risk if segment performance deteriorates.
- Contractual obligations totaled $87.8 million, including $42.3 million of operating leases, $26.1 million of purchase obligations and $18.7 million of debt obligations.
- Unrecognized tax benefits were approximately $5.0 million on the balance sheet; the company disclosed potential additional tax liability of approximately $83 million if certain foreign earnings were no longer considered indefinitely reinvested.
- Management reported no material unresolved legal proceedings, and Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor Verification Checklist
- Confirm that this filing belongs to II-VI Incorporated rather than Coherent Corp. and that the relevant period is fiscal year 2011, not 2010 Q4.
- Reconcile the reported fiscal 2011 results with the full-year inclusion of Photop and the partial-year inclusion of MLA.
- Assess whether inventory growth and the $40.9 million capital-expenditure program generated adequate returns and operating cash flow.
- Review the terms, covenants and repayment schedule of the new revolving facility and the Japanese yen term note.
- Evaluate the cash impact and integration risks of the July 2011 Aegis acquisition, including the incomplete purchase-price allocation.
- Monitor defense-program funding, government research contracts, international demand and commodity pricing.
- Review goodwill, intangible assets, tax contingencies and the $5.9 million remaining Photop earnout.