Filing context and reporting period
The provided filing is not for Coherent Corp. or 2012 Q4. It is II-VI Incorporated’s Form 10-K for the fiscal year ended June 30, 2013, filed August 28, 2013. II-VI operated as a vertically integrated manufacturer of engineered materials and opto-electronic components serving industrial, optical communications, military, semiconductor, medical and consumer markets. Its four reportable segments were Infrared Optics, Near-Infrared Optics, Military & Materials, and Advanced Products Group.
Financial performance and position
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $558.4 million | $534.6 million | +4% |
| Gross profit | $197.6 million | $192.7 million | +3% |
| Gross margin | 35.4% | 36.0% | Down 60 bps |
| Earnings before income taxes | $70.7 million | $78.9 million | Down 10% |
| Net earnings attributable to II-VI | $50.8 million | $60.3 million | Down 16% |
| Diluted EPS | $0.80 | $0.94 | Down 15% |
| Operating cash flow | $107.6 million | $88.1 million | +22% |
| Capital expenditures | $25.3 million | $42.8 million | Down 41% |
| Cash and cash equivalents | $185.4 million | $134.9 million | +37% |
| Total debt | $114.0 million | $12.8 million | Significant increase |
Operating margin is not separately stated in the provided filing; earnings before income taxes were 12.7% of revenue versus 14.8% in FY2012. The effective tax rate increased to 26.5% from 22.3%. Working capital was $366.7 million, total assets were $863.8 million, and shareholders’ equity was $636.1 million at June 30, 2013.
Cash flow from operations exceeded capital expenditures, but investing cash usage was $144.5 million, primarily because of acquisitions. Financing cash flow was $85.8 million, including $102.0 million of net long-term borrowings and $20.0 million of share repurchases.
Material changes versus the prior comparable period
- Bookings declined 1% to $527.2 million from $534.9 million. Excluding the FY2013 acquisitions, bookings declined 10%.
- Reported revenue increased because of acquisitions; excluding $52.3 million of acquisition-related revenue, revenue declined approximately 5%.
- Infrared Optics revenue was broadly stable at $203.3 million, while segment earnings declined to $49.5 million from $51.1 million.
- Near-Infrared Optics revenue increased 11% to $154.9 million and segment earnings increased 40% to $19.6 million, aided by acquisitions and recovery from the Thailand flooding.
- Military & Materials revenue declined 12% to $104.4 million and segment loss widened to $6.1 million from $1.7 million, primarily due to weaker selenium and tellurium demand and pricing.
- Advanced Products Group revenue increased 28% to $95.8 million, principally from the M Cubed acquisition, but segment earnings fell to $1.8 million from $8.4 million because of weaker Marlow product mix and low-margin M Cubed results.
- Gross margin was pressured by $4.4 million of PRM inventory write-offs and equipment impairment and a $2.7 million selenium inventory write-down. FY2012 had included an $8.7 million tellurium and selenium inventory write-down.
Acquisitions, outlook, risks and unusual items
- II-VI acquired M Cubed for $68.2 million net of cash acquired, the Oclaro thin-film filter and interleaver businesses for $27.4 million, and LightWorks for an effective purchase price of $33.9 million, including a $3.3 million contingent earnout liability.
- The Company acquired the remaining 25% of HIGHYAG for $7.6 million and recorded a $1.0 million dividend payable. Effective July 1, 2013, HIGHYAG was to be reported as wholly owned.
- PRM announced after year-end that it would discontinue its tellurium product line and reduce selenium production, focusing on internal selenium supply and rare earth production. Management expected this to reduce write-downs and earnings volatility.
- Management stated that operating cash flow, cash reserves and available borrowing capacity were expected to fund working capital, capital expenditures and internal and external growth during fiscal 2014. No specific revenue or earnings guidance was provided.
- At June 30, 2013, the Company had $185.4 million of cash, including approximately $144.0 million held outside the United States, $114.0 million of debt and $29.8 million of available borrowing capacity. Its new unsecured revolving facility had a $140 million commitment, expandable by $35 million under specified conditions, and matured in November 2017.
- Principal risks included global economic and cyclical demand, international operations and currency exposure, defense-budget reductions, commodity-price declines, dependence on limited suppliers, complex manufacturing yields, competition, intellectual-property claims, acquisitions and goodwill impairment, environmental and export regulations, and cyber or operational disruptions.
- The filing reports no material unresolved legal proceedings and states that management and Ernst & Young concluded internal controls over financial reporting were effective. However, the FY2013 acquisitions, representing approximately 17.1% of total assets and 9.4% of revenue, were excluded from management’s internal-control assessment.
- The Company did not pay dividends and did not expect to pay cash dividends in the foreseeable future.
Important facts for investors to verify
- Confirm the requested issuer and period: the source is II-VI Incorporated FY2013, not Coherent Corp. 2012 Q4.
- Review whether revenue and earnings growth were acquisition-driven, including the effect of the three FY2013 acquisitions and related debt financing.
- Assess PRM’s restructuring, remaining selenium and rare earth exposure, inventory valuation and potential future write-downs.
- Reconcile reported cash with debt, available credit, foreign-held cash and the $58 million potential deferred U.S. tax liability on undistributed foreign earnings.
- Evaluate the sustainability of the $107.6 million operating cash flow after excluding the $4.8 million Thailand-flooding settlement and considering working-capital movements.
- Review the $3.3 million LightWorks earnout, the $8.6 million HIGHYAG redemption obligation and other contractual commitments due in fiscal 2014.
- Examine segment trends, particularly the Military & Materials loss and the decline in Advanced Products Group profitability.