II-VI Incorporated Fiscal 2018 Form 10-K Summary
Business context and reporting period
The provided filing is for II-VI Incorporated, not Coherent Corp. It is an annual Form 10-K for the fiscal year ended June 30, 2018; the filing does not represent a standalone 2017 fourth quarter report. II-VI develops and manufactures engineered materials, optoelectronic components, lasers, optical assemblies and related devices for industrial materials processing, optical communications, military, consumer electronics, semiconductor equipment, life sciences and automotive markets.
The company reports three segments: II-VI Laser Solutions, II-VI Photonics and II-VI Performance Products. Approximately 68% of fiscal 2018 revenue came from customers outside the United States. Bookings increased to approximately $1.2 billion from $1.1 billion, while backlog increased to approximately $450 million from $400 million.
Financial performance and key metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $1,158.8 million | $972.0 million | +19% |
| Gross profit | $461.3 million | $388.3 million | +19% |
| Gross margin | 39.8% | 39.9% | Down 0.1 percentage point |
| Earnings before taxes | $122.2 million | $118.8 million | +3% |
| Net earnings | $88.0 million | $95.3 million | −8% |
| Diluted EPS | $1.35 | $1.48 | −9% |
| Operating cash flow | $161.0 million | $118.6 million | +36% |
| Capital expenditures | $153.4 million | $138.5 million | +11% |
| Cash and equivalents | $247.0 million | $271.9 million | −9% |
| Total debt | $439.0 million | $342.0 million | +28% |
| Working capital | $525.4 million | $517.3 million | +2% |
Internal research and development expense increased to $117.2 million, or 10.1% of revenue, from $96.8 million, or 10.0%. SG&A increased to $208.8 million, although it declined slightly as a percentage of revenue to 18.0% from 18.1%. Interest expense increased to $18.4 million from $6.8 million.
Segment results were:
| Segment | Fiscal 2018 revenue | Revenue growth | Fiscal 2018 operating income | Operating income growth |
|---|---|---|---|---|
| II-VI Laser Solutions | $428.0 million | +26% | $36.8 million | +19% |
| II-VI Photonics | $464.4 million | +11% | $67.7 million | +7% |
| II-VI Performance Products | $266.4 million | +24% | $30.8 million | +43% |
Net cash used in investing activities was $285.0 million, including $153.4 million of capital expenditures, $80.5 million for acquisitions and $52.1 million for equity investments. Net cash provided by financing activities was $97.0 million. The company held approximately $218 million of cash outside the United States.
Material changes versus the prior comparable period
- Revenue growth was broad-based, led by industrial laser optics and components, VCSELs, silicon carbide products, optical communications products and semiconductor equipment applications.
- Fiscal 2018 net income declined despite higher revenue because of increased investment, materially higher interest expense and tax effects.
- The effective tax rate increased to 28.0% from 19.8%. The Tax Cuts and Jobs Act generated an estimated $8.0 million net tax charge, including taxes related to planned repatriation of foreign earnings; the filing states that the accounting remained provisional.
- II-VI acquired Kaiam Laser Limited in August 2017 for approximately $79.5 million net of cash acquired. Kaiam contributed $3.4 million of revenue and a $12.5 million net loss in fiscal 2018, and was excluded from management's internal-control assessment.
- The company issued $345 million principal amount of 0.25% convertible senior notes due 2022, received approximately $336 million of net proceeds, repaid debt and repurchased approximately $49.9 million of common stock.
- The company expanded manufacturing capacity substantially. Net property, plant and equipment increased to $524.9 million from $367.7 million, while inventory increased to $248.3 million from $203.7 million.
Outlook, commentary, risks and unusual items
Management stated that operating cash flow, cash reserves and available borrowing capacity were expected to fund working capital, capital expenditures, scheduled debt repayment, research and development, share repurchases and growth initiatives at least through fiscal 2019. The company expected to acquire CoAdna, Inc. for approximately $85 million around September 1, 2018, financed with cash and credit-facility borrowings. The filing does not provide formal revenue or earnings guidance.
Key strategic priorities include expanding high-growth markets such as 3D sensing, VCSELs, optical communications, silicon carbide and automotive applications; increasing capacity; continuing research and development; leveraging vertical integration; and pursuing acquisitions. Management targeted overall RD&E investment of approximately 10% to 15% of revenue, depending on the investment program.
- Convertible debt creates liquidity, refinancing, conversion and potential dilution risks. The initial conversion price was $47.06 per share, and the notes mature in September 2022.
- Available borrowing capacity was $246.4 million at June 30, 2018, compared with $73.5 million a year earlier. The company reported compliance with debt covenants.
- The business is exposed to cyclical demand, foreign exchange volatility, international operations, tariffs and changing export controls, particularly given its substantial non-U.S. sales and manufacturing footprint.
- Manufacturing depends on complex processes and limited sources for specialized materials, including ZnSe, GaAs, InP, silicon carbide and other compounds.
- Competition, product development execution, customer demand variability, supply commitments, acquisitions and integration remain material risks.
- The company is exposed to environmental, hazardous-material, data-privacy, cybersecurity, tax and intellectual-property risks.
- Legal proceedings were described as ordinary-course matters, with management believing that any resulting liabilities would not materially affect financial condition, liquidity or results of operations.
- Goodwill and indefinite-lived intangible assets were not impaired. The company reported effective internal control over financial reporting, but the assessment excluded Kaiam.
Most important facts for an investor to verify
- Confirm the requested issuer: the supplied filing is for II-VI Incorporated, while the request metadata identifies Coherent Corp.
- Confirm the intended reporting period: the filing covers the full fiscal year ended June 30, 2018, not specifically 2017 Q4.
- Review the sustainability of revenue growth and backlog, including exposure to industrial lasers, optical communications, VCSELs, silicon carbide and 3D sensing.
- Assess whether higher R&D, capacity spending, acquisition costs, interest expense and tax charges will continue to pressure earnings and margins.
- Evaluate liquidity after the planned CoAdna acquisition, scheduled debt repayments, capital expenditures and the $345 million convertible notes.
- Review Kaiam's ongoing losses, integration progress and the scope of internal-control testing excluded from the fiscal 2018 assessment.
- Verify provisional Tax Cuts and Jobs Act accounting, foreign earnings repatriation assumptions and potential future tax adjustments.
- Reconcile the filing's debt presentation: balance-sheet total debt is $439.0 million, while contractual principal obligations total $496.5 million before discounts and other adjustments.