10-QPeriod: Q3 FY2019

COHERENT CORP. Quarterly Report for Q3 Ended Mar 31, 2019

Filed May 9, 2019For Securities:COHR

Summary

For the nine months ended March 31, 2019, II-VI Incorporated (now Coherent Corp.) reported a significant increase in net earnings to $79.5 million ($1.21 per diluted share) from $60.8 million ($0.93 per diluted share) in the prior year period. This growth was driven by a 19% increase in revenue to $999.7 million, primarily from strong demand in optical communications, RF electronics, and power conversion systems. The company has made strategic acquisitions, including CoAdna, a product line, and Redstone Aerospace, which are being integrated to drive future growth. However, the quarter ended March 31, 2019, saw a decrease in net earnings to $24.6 million ($0.38 per diluted share) compared to $30.1 million ($0.45 per diluted share) in the prior year quarter, impacted by under-absorption of manufacturing costs in the 3D Sensing product line and production challenges in the Performance Products segment. The company is also progressing towards its significant merger with Finisar, which is expected to close around mid-2019 and is being financed through new credit facilities.

Financial Highlights

50 data points
Beta

Revenue

$342.50M

37.2% Gross Margin

Net Income

$24.64M

7.2% Net Margin

EPS (Diluted)

$0.38

Total Assets

$1.94B

Cash & Equivalents

$221.21M

Free Cash Flow

-$7.62M

Financial Statements
Beta
Revenue$342.50M
Cost of Revenue$215.21M
Gross Profit$127.28M
R&D Expenses$36.03M
SG&A Expenses$60.13M
Operating Expenses$315.48M
Operating Income$31.13M
Interest Expense$5.65M
Net Income$24.64M
EPS (Basic)$0.39
EPS (Diluted)$0.38
Shares Outstanding (Basic)64K
Shares Outstanding (Diluted)66K

Key Highlights

  • 1Revenue increased by 19% year-over-year for the nine months ended March 31, 2019, reaching $999.7 million, driven by strong demand in optical communications and other key markets.
  • 2Net earnings for the nine months ended March 31, 2019, saw substantial growth, increasing to $79.5 million from $60.8 million in the prior year.
  • 3Gross margin as a percentage of revenue declined in both the three-month and nine-month periods, attributed to a shift in product mix towards lower-margin products and under-absorption of manufacturing costs in certain segments.
  • 4The company completed three acquisitions in the nine months leading up to March 31, 2019: CoAdna Holdings, Inc., a product line, and Redstone Aerospace Corporation, bolstering its Photonics and Performance Products segments.
  • 5Significant merger activity is underway with Finisar Corporation, with shareholder approvals obtained and regulatory approvals progressing, aiming for a mid-2019 closing.
  • 6The company entered into a new Credit Agreement for $1.625 billion to finance the Finisar merger and refinance existing debt.
  • 7Internal research and development expenses increased, reflecting continued investment in new technologies such as 5G and consumer electronics.

Frequently Asked Questions

Revenue growth was primarily driven by increased demand from optical communication customers in the United States and China, fueled by global deployments of 5G optical networks and U.S. metro communication upgrades. Additionally, growing demand for silicon carbide for RF electronics, high-power switching, and power conversion systems, as well as optical components for military applications, contributed to the increase.

The gross margin percentage decreased due to a shift in product mix towards lower-margin products within the Photonics segment. Furthermore, under-absorption of manufacturing costs related to delays in the 3D Sensing product line and production challenges in the II-VI Performance Product Segment also negatively impacted the gross margin.

The merger with Finisar is progressing well. Both companies' shareholders have approved the transaction, and necessary regulatory approvals are being obtained. The company has secured a new $1.625 billion credit facility to finance the cash portion of the merger consideration and expects the transaction to close around the middle of fiscal year 2019.

The company expects that cash flow from operations, existing cash reserves of approximately $221.2 million, and available borrowing capacity of approximately $171.8 million will be sufficient to fund its working capital needs, capital expenditures, debt repayments, R&D investments, the Finisar merger, and other growth objectives over the next twelve months. The company also has access to a new $1.625 billion credit facility.