Business Context and Reporting Period
This unaudited Form 10-Q is for II-VI Incorporated, not Coherent Corp. The filing covers the quarter and six months ended December 31, 2013, II-VI’s fiscal 2014 second quarter. II-VI develops and manufactures engineered materials and optoelectronic components for industrial, optical communications, military, semiconductor, medical, consumer and thermoelectric markets.
The company established a new Active Optical Products segment following its acquisitions of Oclaro’s Switzerland-based semiconductor laser business on September 12, 2013 and fiber amplifier and micro-optics business on November 1, 2013. It also completed the discontinuance of its tellurium product line.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2013 | Six months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Revenue | $171.8 million | $125.1 million | $321.8 million | $253.1 million |
| Gross margin | $53.4 million; 31.1% | $47.3 million; 37.8% | $109.7 million; 34.1% | $97.7 million; 38.6% |
| Earnings from continuing operations | $7.4 million | $13.1 million | $17.1 million | $28.0 million |
| Net earnings attributable to II-VI | $7.6 million | $12.2 million | $17.3 million | $24.9 million |
| Diluted EPS from continuing operations | $0.12 | $0.20 | $0.27 | $0.43 |
| Bookings | $167.9 million | $126.0 million | $310.5 million | $237.3 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $55.9 million | $61.0 million |
At December 31, 2013, cash and cash equivalents were $212.7 million, inventories were $177.1 million, total assets were $1.116 billion and shareholders’ equity was $667.5 million. Total debt was $282.9 million, including $20.0 million current debt and $262.9 million long-term debt. Available borrowing capacity was $40.5 million.
For the six months, investing cash outflows were $189.5 million, including $175.2 million for business acquisitions and $14.3 million for capital expenditures. Financing activities provided $159.5 million, principally from $183.0 million of borrowings. Cash increased by $27.3 million to $212.7 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 37% for the quarter and 27% for the six-month period, primarily from the Oclaro acquisitions and prior acquisitions.
- Bookings increased 33% for the quarter and 31% year to date.
- Gross margin declined by 670 basis points for the quarter and 450 basis points year to date. The principal factors were purchase-accounting inventory adjustments related to the Oclaro acquisitions, pricing pressure on legacy products, higher material costs and unfavorable manufacturing overhead absorption.
- Continuing-operations earnings attributable to II-VI declined 42% for the quarter and 37% year to date. Higher interest expense and the prior-year Thailand flood settlement also affected comparisons.
- Internal research and development increased to $11.4 million for the quarter and $19.1 million year to date, reflecting investment in 100G optical communications products and the acquired businesses.
- Debt increased from $114.0 million at June 30, 2013 to $282.9 million at December 31, 2013, primarily to fund acquisitions.
- The Active Optical Products segment generated $33.4 million of quarterly revenue and a $6.8 million segment loss; year-to-date revenue was $38.2 million and the segment loss was $10.9 million. Results included transaction costs and purchase-accounting inventory adjustments.
- Near-Infrared Optics revenue declined 3% for the quarter and 2% year to date, while segment earnings declined 52% and 57%, respectively, due to legacy-product price erosion and increased development spending.
- Military & Materials and Advanced Products Group improved materially, helped by the PRM restructuring, the LightWorks and M Cubed acquisitions, and stronger Marlow and M Cubed performance.
- The tellurium product line was reported as a discontinued operation. It contributed $0.1 million of after-tax earnings in each current period, compared with losses of $0.6 million for the quarter and $2.4 million year to date in the prior periods.
Outlook, Commentary, Risks and Unusual Items
Management expected improved future performance from Active Optical Products as planned synergies were realized and nonrecurring purchase-accounting inventory charges ceased. The filing does not provide formal revenue or earnings guidance.
- Management stated that operating cash flow, cash reserves and available borrowing capacity should fund working capital, capital expenditures, share repurchases and growth objectives for the next twelve months.
- The amended credit facility provides a $225 million revolving facility and a $100 million term loan through September 2018. The company was in compliance with its financial covenants at December 31, 2013.
- Key risks include integration and assimilation of recently acquired businesses, rapidly changing technology, customer purchasing patterns, new-product acceptance, competition, economic conditions, foreign-currency exposure and uncertainty in U.S. defense spending.
- Foreign-currency forward contracts had $8.0 million of notional exposure at December 31, 2013. A 10% change in the Japanese yen/dollar exchange rate would have affected six-month revenue by approximately negative $1.5 million to positive $1.9 million.
- A 1% change in borrowing interest rates would have changed interest expense by approximately $0.6 million for the quarter and $1.0 million year to date.
- The company assumed an $8.9 million unfunded Swiss pension liability in the Laser Enterprise acquisition and anticipated approximately $1.0 million of additional contributions during the remainder of fiscal 2014.
- Contractual obligations totaled $389.3 million, including $282.9 million of debt, $24.5 million of estimated interest, $12.0 million of capital lease obligations, $52.1 million of operating leases and $17.8 million of purchase obligations.
- In February 2014, the board authorized a $20 million share-repurchase program; no purchases had occurred under that program as of the filing date.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for II-VI Incorporated, while the request metadata identifies Coherent Corp.
- Assess whether Active Optical Products can reach profitability after acquisition integration, transaction costs and purchase-accounting effects.
- Monitor leverage, term-loan amortization, interest-rate sensitivity and remaining borrowing capacity.
- Evaluate the sustainability of bookings growth relative to reported revenue and the effect of acquisition-related bookings.
- Track gross-margin recovery, particularly after inventory fair-value adjustments, pricing pressure and higher manufacturing costs.
- Review exposure to optical-network technology transitions, defense-spending uncertainty, foreign exchange and customer concentration.
- Verify the final purchase-price allocations for the two Oclaro acquisitions, which remained preliminary at December 31, 2013.