Coherent Corp 10-Q for FY2022 Q1
Coherent Corp. (COHR)
10-Q
2021-11-09
For: 2021-09-30
View Original
Added on
April 10, 2026
About this 10-Q
Coherent Corp filed this 10-Q on November 9, 2021, covering the quarter ended September 30, 2021 (FY2022 Q1).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $795.11M
- up 9.2% from $728.08M a year earlier
- Net income
- $74.46M
- up 60.9% from net income of $46.27M a year earlier
- Diluted EPS
- $0.50
- up 31.6% from $0.38 a year earlier
\
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________________
FORM 10-Q
________________________________________________________________
| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||
For the quarterly period ended September 30, 2021
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||
for the transition period from to .
Commission File Number: 001-39375
________________________________________________________________
(Exact name of registrant as specified in its charter)
________________________________________________________________
| PENNSYLVANIA | |||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Zip Code) | |||||||||||
| (Address of principal executive offices) | |||||||||||
Registrant’s telephone number, including area code: 724 -352-4455
N/A
(Former name, former address and former fiscal year, if changed since last report)
________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At November 5, 2021, 106,139,773 shares of Common Stock, no par value, of the registrant were outstanding.
II-VI INCORPORATED
INDEX
| Page No. | |||||||||||
Condensed Consolidated Balance Sheets – September 30, 2021 and June 30, 2021 (Unaudited) | |||||||||||
Condensed Consolidated Statements of Earnings – Three months ended September 30, 2021 and 2020 (Unaudited) | |||||||||||
Condensed Consolidated Statements of Comprehensive Income – Three months ended September 30, 2021 and 2020 (Unaudited) | |||||||||||
Condensed Consolidated Statements of Cash Flows – Three months ended September 30, 2021 and 2020 (Unaudited) | |||||||||||
Condensed Consolidated Statements of Shareholders’ Equity and Mezzanine Equity – Three months ended September 30, 2021 and 2020 (Unaudited) | |||||||||||
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
II-VI Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($000)
| September 30, 2021 | June 30, 2021 | ||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable - less allowance for doubtful accounts of $ and $ | |||||||||||
| Inventories | |||||||||||
| Prepaid and refundable income taxes | |||||||||||
| Prepaid and other current assets | |||||||||||
| Total Current Assets | |||||||||||
| Property, plant & equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| Liabilities, Mezzanine Equity and Shareholders' Equity | |||||||||||
| Current Liabilities | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued compensation and benefits | |||||||||||
| Operating lease current liabilities | |||||||||||
| Accrued income taxes payable | |||||||||||
| Other accrued liabilities | |||||||||||
| Total Current Liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred income taxes | |||||||||||
| Operating lease liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total Liabilities | |||||||||||
| Mezzanine Equity | |||||||||||
Series B redeemable convertible preferred stock, | |||||||||||
| Shareholders' Equity | |||||||||||
Series A preferred stock, | |||||||||||
Common stock, | |||||||||||
Accumulated other comprehensive income | |||||||||||
| Retained earnings | |||||||||||
Treasury stock, at cost; | ( | ( | |||||||||
| Total Shareholders' Equity | |||||||||||
| Total Liabilities, Mezzanine Equity and Shareholders' Equity | $ | $ | |||||||||
- See notes to condensed consolidated financial statements.
3
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Earnings (Unaudited)
($000, except per share data)
| Three Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues | $ | $ | |||||||||
| Costs, Expenses, and Other Expense (Income) | |||||||||||
| Cost of goods sold | |||||||||||
| Internal research and development | |||||||||||
| Selling, general and administrative | |||||||||||
| Interest expense | |||||||||||
| Other expense (income), net | ( | ||||||||||
| Total Costs, Expenses, & Other Expense (Income) | |||||||||||
| Earnings Before Income Taxes | |||||||||||
| Income Tax Expense | |||||||||||
| Net Earnings | $ | $ | |||||||||
| Less: Dividends on Preferred Stock | $ | $ | |||||||||
| Net Earnings available to the Common Shareholders | $ | $ | |||||||||
| Basic Earnings Per Share | $ | $ | |||||||||
| Diluted Earnings Per Share | $ | $ | |||||||||
- See notes to condensed consolidated financial statements.
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
($000)
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Net earnings | $ | $ | |||||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $ | ( | ||||||||||||||||||||||
| Comprehensive income | $ | $ | |||||||||||||||||||||
- See notes to condensed consolidated financial statements.
4
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
($000)
| Three Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net earnings | $ | $ | |||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Share-based compensation expense | |||||||||||
| Amortization of discount on convertible debt and debt issuance costs | |||||||||||
| Debt extinguishment costs | |||||||||||
| Unrealized losses (gains) on foreign currency remeasurements and transactions | ( | ||||||||||
| Earnings from equity investments | ( | ( | |||||||||
| Deferred income taxes | |||||||||||
| Increase (decrease) in cash from changes in (net of effect of acquisitions): | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Accounts payable | ( | ( | |||||||||
| Income taxes | ( | ||||||||||
| Accrued compensation and benefits | ( | ( | |||||||||
| Other operating net assets (liabilities) | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash Flows from Investing Activities | |||||||||||
| Additions to property, plant & equipment | ( | ( | |||||||||
| Purchases of businesses, net of cash acquired | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Proceeds from issuance of common shares | |||||||||||
| Proceeds from issuance of Series A preferred shares | |||||||||||
| Payments on borrowings under Term A Facility | ( | ( | |||||||||
| Payments on borrowings under Term B Facility | ( | ||||||||||
| Payments on borrowings under Revolving Credit Facility | ( | ||||||||||
| Equity issuance costs | ( | ||||||||||
| Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan | |||||||||||
| Payments in satisfaction of employees' minimum tax obligations | ( | ( | |||||||||
| Payment of dividends | ( | ||||||||||
| Other financing activities | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and Cash Equivalents at Beginning of Period | |||||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | |||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Additions to property, plant & equipment included in accounts payable | $ | $ | |||||||||
- See notes to condensed consolidated financial statements.
5
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity and Mezzanine Equity (Unaudited)
($000, including share amounts)
| Common Stock | Preferred Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total | Mezzanine Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2021 | Shares | Amount | Shares | Amount | Shares | Amount | Preferred Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | — | — | — | — | ( | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | ( | — | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $ | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accretion to redemption value of Series B shares issued in March 2021 | — | — | — | — | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment for ASU 2020-06 | — | ( | — | — | — | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - September 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2020 | Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - June 30, 2020 | $ | — | $ | — | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in underwritten public offering | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $( | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - September 30, 2020 | $ | $ | $ | $ | $ | ( | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
6
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
Note 2. Recently Issued Financial Accounting Standards
Note 3. Pending Coherent Acquisition
On March 25, 2021, II-VI, Coherent, Inc., and Watson Merger Sub Inc., a wholly owned subsidiary of II-VI (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, Merger Sub will be merged with and into Coherent, and Coherent will continue as the surviving corporation in the merger and wholly owned subsidiary of II-VI (the “Merger”).
Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, at the effective time of the Merger (the “Effective Time”), each share of common stock of Coherent, par value $0.01 per share (the “Coherent Common Stock”), issued and outstanding immediately prior to the Effective Time will be canceled and extinguished and automatically converted into the right to receive the following consideration (collectively, the “Merger Consideration”):
(A) $220.00 in cash, without interest (the "Cash Consideration"), and
(B) 0.91 of a validly issued, fully paid and nonassessable share of common stock of II-VI, no par value per share ("II-VI Common Stock")
Pursuant to the terms of the Merger Agreement, each Coherent restricted stock unit award (a “Coherent RSU”), other than Director RSUs (as defined below), outstanding immediately prior to the Effective Time will be automatically converted into time-based restricted stock units denominated in shares of II-VI Common Stock entitling the holder to receive, upon settlement, a number of shares of II-VI Common Stock equal to the number of shares of Coherent Common Stock subject to the Coherent RSU multiplied by the sum of (A) 0.91 , and (B) the quotient obtained by dividing the Cash Consideration by the volume weighted average price of a share of II-VI Common Stock for a 10 trading day period ending prior to the closing of the Merger (the “Closing”). For Coherent RSUs subject to performance-based vesting conditions and metrics, the number of shares of II-VI
7
Common Stock subject to the converted Coherent RSUs will be determined after giving effect to the Coherent Board of Directors’ determination of the number of Coherent RSUs earned, based on the greater of the target or actual level of achievement of such goals or metrics immediately prior to the Effective Time.
The converted Coherent RSUs generally will be subject to the same terms and conditions that applied to the awards immediately prior to the Effective Time, provided that any Coherent RSUs subject to performance-based vesting conditions will be subject solely to time-and service-based vesting. Each Coherent RSU that is outstanding as of the date of the Merger Agreement and as of immediately prior to the Effective Time will be entitled to the following vesting acceleration benefits:
(A) for any holder of Coherent RSUs who is a participant under Coherent’s Change of Control and Leadership Change Severance Plan (the “CIC Plan”), the acceleration benefits under the CIC Plan upon such participant’s involuntary termination of employment in accordance with the terms and conditions set forth therein; and
(B) for any holder who is not a participant in the CIC Plan, the following vesting acceleration benefits upon his or her termination of employment by Coherent, II-VI or their respective subsidiaries without “cause” within the period beginning immediately following the date of the Closing and ending on the date that is 12 months following the date of the Closing (or, if earlier, December 31, 2022) (a “Qualifying Termination”), (1) if such holder’s Qualifying Termination occurs during calendar year 2021, the sum of: (x) 100 % of the total number of converted Coherent RSUs that otherwise would have vested during calendar year 2021 under the applicable vesting schedule in effect on the Closing had such holder remained employed with Coherent, II-VI or their respective subsidiaries through the last applicable vesting date for such award in calendar year 2021 (and reduced by the total number of converted Coherent RSUs that vested in calendar year 2021 prior to such Qualifying Termination) plus (y) 50 % of the total number of converted Coherent RSUs that otherwise would have vested during calendar year 2022 under the applicable vesting schedule in effect on the Closing had such holder remained employed with Coherent, II-VI or their respective subsidiaries through the last applicable vesting date for such award in calendar year 2022, or (2) if such holder’s Qualifying Termination occurs during calendar year 2022, 50 % of the total number of converted Coherent RSUs that otherwise would have vested during calendar year 2022 under the applicable vesting schedule in effect on the Closing had such holder remained employed with Coherent, II-VI or their respective subsidiaries through the last applicable vesting date for such award in calendar year 2022 (and reduced by the total number of converted Coherent RSUs that vested in calendar year 2022 prior to such Qualifying Termination).
Each Coherent RSU granted to a non-employee member of Coherent’s Board of Directors (“Director RSUs”) (whether or not vested) that is outstanding immediately prior to the Effective Time will automatically vest in full and be canceled and converted into the right to receive the Merger Consideration as if such Director RSU had been settled in shares of Coherent Common Stock immediately prior to the Effective Time.
The Boards of Directors of II-VI and Coherent unanimously approved the Merger and the Merger Agreement. II-VI filed with the SEC a registration statement on Form S-4 relating to the Merger, and the SEC declared that registration statement to be effective on May 6, 2021. Shareholders of II-VI and stockholders of Coherent voted to approve proposals related to the Merger at special meetings held on June 24, 2021 by the respective companies.
The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions, including review and approval of the Merger by the State Administration for Market Regulation in China. Subject to the satisfaction or waiver of each of the closing conditions, II-VI expects that the Merger will be completed in the first calendar quarter of 2022. However, it is possible that factors outside the control of both companies could result in the Merger being completed at a different time or not at all.
In connection with entering into the Merger Agreement, II-VI has obtained a fully underwritten financing commitment pursuant to a commitment letter (the “Commitment Letter”), dated as of March 25, 2021, as further amended on April 21, 2021, with JPMorgan Chase Bank, N.A., Citigroup Global Markets Inc., MUFG Bank, Ltd., MUFG Securities Americas Inc., PNC Capital Markets LLC, PNC Bank, National Association, HSBC Securities (USA) Inc., HSBC Bank USA, National Association, Citizens Bank, N.A., Mizuho Bank, Ltd., BMO Capital Markets Corp., Bank of Montreal, TD Securities (USA) LLC, The Toronto-Dominion Bank, New York Branch, TD Bank, N.A. and First National Bank of Pennsylvania (collectively, the “Commitment Parties”) pursuant to which the Commitment Parties have committed to provide up to $5.1 billion in debt financing. II-VI and the Commitment Parties amended and restated the Commitment Letter on October 25, 2021 (the "Amended and Restated Commitment Letter") to effect certain amendments thereto, including to reduce the amount of commitments thereunder to $4.99 billion. The obligation of the Commitment Parties to provide the debt financing provided for in the Amended and Restated Commitment Letter is subject to a number of customary conditions.
In connection with entering into the Merger Agreement, II-VI entered into an Amended and Restated Investment Agreement, dated as of March 30, 2021, (the “Investment Agreement”), with BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital
Private Equity, LP (the “Investor”). Pursuant to the terms of the Investment Agreement, on March 31, 2021, II-VI issued, sold, and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock of the Company, no par value per share (“II-VI Series B-1 Convertible Preferred Stock”), for $10,000 per share (the “Equity Per Share Price”), resulting in an aggregate purchase price of $750 million. Subject to the terms and conditions of the Investment Agreement, among other things, the Company and the Investor also agreed that the Company would issue, sell and deliver to the Investor:
•105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company, no par value per share ("II-VI Series B-2 Convertible Preferred Stock," and together with the II-VI Series B-1 Convertible Preferred Stock, “New II-VI Convertible Preferred Stock”), for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate purchase price of $1.1 billion, immediately prior to closing; and
•immediately prior to Closing, if elected by the Company and agreed by the Investor, up to an additional 35,000 shares of II-VI Series B-2 Convertible Preferred Stock (the "Upsize Shares") for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate maximum purchase price for the Upsize Shares of $350 million.
Following the Company’s provision of notice to the Investor of its election to offer the Upsize Shares, the Investor informed the Company on June 8, 2021 of its agreement to purchase the Upsize Shares from the Company immediately prior to the Closing, increasing the Investor’s total equity commitment to II-VI pursuant to the Investment Agreement to $2.2 billion.
The expenses associated with the pending acquisition for the three months ended September 30, 2021, have not been allocated to an Operating Segment, and are presented in the Unallocated and Other in Note 13. Segment Reporting.
Note 4. Revenue from Contracts with Customers
The Company believes that disaggregating revenue by end market provides the most relevant information regarding the nature, amount, timing, and uncertainty of revenues and cash flows.
The following tables summarize disaggregated revenue for the three months ended September 30, 2021 and 2020 ($000):
| Three Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Photonic Solutions | Compound Semiconductors | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Communications | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||||||||||||||
| Industrial | |||||||||||||||||||||||||||||||||||||||||||||||
| Aerospace & Defense | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Revenues | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Photonic Solutions | Compound Semiconductors | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Communications | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||||||||||||||
| Industrial | |||||||||||||||||||||||||||||||||||||||||||||||
| Aerospace & Defense | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Revenues | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
Contract Liabilities
Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Contract liabilities relate to billings in advance of performance under the contract. Contract liabilities are recognized as revenue when the performance obligation has been performed. During the three months ended September 30, 2021, the Company recognized revenue of $4 million related to customer payments that were included as contract liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2021. The Company had $51 million of contract liabilities recorded in the Condensed Consolidated Balance Sheet as of September 30, 2021.
Note 5. Inventories
| September 30, 2021 | June 30, 2021 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work in progress | |||||||||||
| Finished goods | |||||||||||
| $ | $ | ||||||||||
Note 6. Property, Plant and Equipment
| September 30, 2021 | June 30, 2021 | ||||||||||
| Land and improvements | $ | $ | |||||||||
| Buildings and improvements | |||||||||||
| Machinery and equipment | |||||||||||
| Construction in progress | |||||||||||
| Finance lease right-of-use asset | |||||||||||
| Less accumulated depreciation | ( | ( | |||||||||
| $ | $ | ||||||||||
Note 7. Goodwill and Other Intangible Assets
| Three Months Ended September 30, 2021 | |||||||||||||||||
| Photonic Solutions | Compound Semiconductors | Total | |||||||||||||||
| Balance-beginning of period | $ | $ | $ | ||||||||||||||
| Foreign currency translation | ( | ( | ( | ||||||||||||||
| Balance-end of period | $ | $ | $ | ||||||||||||||
| September 30, 2021 | June 30, 2021 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||||||||||
| Technology | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Trade Names | ( | ( | |||||||||||||||||||||||||||||||||
| Customer Lists | ( | ( | |||||||||||||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
Note 8. Debt
| September 30, 2021 | June 30, 2021 | ||||||||||
Term A Facility, interest at LIBOR, as defined, plus | $ | $ | |||||||||
| Debt issuance costs, Term A Facility and Revolving Credit Facility | ( | ( | |||||||||
| ( | ( | ||||||||||
| Total debt | |||||||||||
| Current portion of long-term debt | ( | ( | |||||||||
| Long-term debt, less current portion | $ | $ | |||||||||
Senior Credit Facilities
The Company currently has Senior Credit Facilities with Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lenders party thereto.
The credit agreement governing the Senior Credit Facilities (the "Credit Agreement") provides for senior secured financing of $2.4 billion in the aggregate, consisting of
(i)Aggregate principal amount of $1,255 million for a -year senior secured first-lien term A loan facility (the “Term A Facility”),
(ii)Aggregate principal amount of $720 million for a -year senior secured term B loan facility (the “Term B Facility” and together with the Term A Facility, the “Term Loan Facilities”), which was repaid in full during the quarter ended September 30, 2020, and
(iii)Aggregate principal amount of $450 million for a -year senior secured first-lien revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “Senior Credit Facilities”).
The Credit Agreement also provides for a letter of credit sub-facility not to exceed $25 million and a swing loan sub-facility initially not to exceed $20 million.
The Term B Facility was repaid in full by the Company in fiscal year 2021.
The Company is obligated to repay the outstanding principal amount of the Term A Facility in quarterly installments equal to 1.25 % of the initial aggregate principal amount of the Term A Facility, with the remaining outstanding balance due and payable on the fifth anniversary of September 24, 2019 (the "Closing Date").
The Company’s obligations under the Senior Credit Facilities are guaranteed by each of the Company’s existing or future direct and indirect domestic subsidiaries, including Finisar Corporation ("Finisar") and its domestic subsidiaries (collectively, the
11
“Guarantors”). Borrowings under the Senior Credit Facilities are collateralized by a first priority lien in substantially all of the assets of the Company and the Guarantors, except that no real property is collateral under the Senior Credit Facilities.
All amounts outstanding under the Senior Credit Facilities will become due and payable 120 days prior to the maturity of the Company’s currently outstanding 0.25 % Convertible Senior Notes due 2022 (the “II-VI Notes”) if (i) the II-VI Notes remain outstanding, and (ii) the Company has insufficient cash and borrowing availability to repay the principal amount of the II-VI Notes. As of September 30, 2021, the II-VI Notes are now included in the current portion of long-term debt. The Company has sufficient cash to repay the principal amount of the II-VI Notes, therefore the Senior Credit facilities remain classified as long-term obligations in the Condensed Consolidated Balance Sheet.
Amounts outstanding under the Senior Credit Facilities will bear interest at a rate per annum equal to an applicable margin over a eurocurrency rate or an applicable margin over a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50 %, (b) Bank of America, N.A.’s prime rate and (c) a eurocurrency rate plus 1.00 %, in each case as calculated in accordance with the terms of the Credit Agreement. The applicable interest rate would increase under certain circumstances relating to events of default. The Company has entered into an interest rate swap contract to hedge its exposure to interest rate risk on its variable rate borrowings under the Senior Credit Facilities. Refer to Note 15 for further information regarding this interest rate swap.
The Credit Agreement contains customary affirmative and negative covenants with respect to the Senior Credit Facilities, including limitations with respect to liens, investments, indebtedness, dividends, mergers and acquisitions, dispositions of assets and transactions with affiliates. The Company will be obligated to maintain a consolidated interest coverage ratio (as calculated in accordance with the terms of the Credit Agreement) as of the end of each fiscal quarter of not less than 3.00 to 1.00. The Company will be obligated to maintain a consolidated total net leverage ratio (as calculated in accordance with the terms of the Credit Agreement) of not greater than (i) 5.00 to 1.00 for the first four fiscal quarters after the Closing Date, commencing with the first full fiscal quarter after the Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through and including the eighth fiscal quarter after the Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As of September 30, 2021, the Company was in compliance with all financial covenants under the Credit Agreement.
Finisar’s outstanding 0.50 % Convertible Senior Notes due 2036 (the “Finisar Notes”) may be redeemed at any time on or after December 22, 2021 in whole or in part at the option of Finisar at a redemption price equal to one hundred percent (100 )% of the principal amount of such Finisar Notes plus accrued and unpaid interest. Each holder of Finisar Notes also may require Finisar to repurchase all or any portion of such holder’s outstanding Finisar Notes for cash on December 15, 2021, December 15, 2026 and December 15, 2031 at a repurchase price equal to one hundred percent (100 %) of the principal amount of such Finisar Notes plus accrued and unpaid interest. The Finisar Notes will mature on December 15, 2036. Interest on the Finisar Notes accrues at 0.50 % per annum, paid semi-annually, in arrears, on June 15 and December 15 of each year.
In connection with the acquisition of Finisar, the Company, Finisar and the trustee entered into a First Supplemental Indenture, dated as of September 24, 2019 (the “First Supplemental Indenture”). The First Supplemental Indenture supplements the base indenture (as supplemented, the “Finisar Indenture”), which governs the Finisar Notes. Pursuant to the terms of the First Supplemental Indenture, the Company has fully and unconditionally guaranteed, on a senior unsecured basis, the due and punctual payment and performance of all obligations of Finisar to the holders of the Finisar Notes. The First Supplemental Indenture also provides that the right of holders of Finisar Notes to convert Finisar Notes into cash and/or shares of Finisar’s common stock, is changed to a right to convert Finisar Notes into cash and/or shares of the II-VI Common Stock, subject to the terms of the Finisar Indenture.
Under the terms of the Finisar Indenture, the consummation and effectiveness of the Merger on the Closing Date constituted a Fundamental Change (as defined in the Finisar Indenture) and a Make-Whole Fundamental Change (as defined in the Finisar Indenture). Accordingly, in accordance with the terms of the Finisar Indenture, each holder of Finisar Notes had the right to (i) convert its Finisar Notes into cash and/or shares of II-VI Common Stock, at Finisar’s option, or (ii) require that Finisar repurchase such holder’s Finisar Notes for an amount in cash equal to one hundred percent (100 )% of the principal amount of such Finisar Notes plus accrued and unpaid interest.
Holders of approximately $560 million in aggregate principal amount of Finisar Notes exercised the repurchase right. Finisar repurchased those Finisar Notes on October 23, 2019 for an aggregate consideration of approximately $561 million in cash, including accrued interest. No holders of Finisar Notes exercised the related conversion right. The Company borrowed $561 million under a delayed draw on its Term Loan A to fund the payment to the holders of Finisar Notes that exercised the
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repurchase right. As of September 30, 2021, approximately $15 million in aggregate principal amount of Finisar Notes remain outstanding.
In August 2017, the Company issued and sold $345 million aggregate principal amount of the II-VI Notes in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended.
Originally, the Company had separately accounted for the value of the conversion option as an equity component, and the resulting debt discount was amortized as additional non-cash interest expense.
With the adoption of ASU 2020-06 on July 1, 2021, the Company reversed that accounting, electing to use the modified retrospective method. The adoption resulted in an increase of $15 million to the current portion of long-term debt, a decrease of $3 million to deferred income taxes, and a decrease of $11 million to shareholders' equity.
The initial conversion rate is 21.25 shares of II-VI Common Stock per $1,000 principal amount of II-VI Notes, which is equivalent to an initial conversion price of $47.06 per share of II-VI Common Stock. Throughout the term of the II-VI Notes, the conversion rate may be adjusted upon the occurrence of certain events. The if-converted value of the II-VI Notes amounted to $435 million as of September 30, 2021 and $532 million as of June 30, 2021 (based on the Company’s closing stock price on the last trading day of the fiscal periods then ended).
Prior to the close of business on the business day immediately preceding June 1, 2022, the Notes will be convertible only under the following circumstances:
(i) during any fiscal quarter commencing after the fiscal quarter ending on December 31, 2017 (and only during such fiscal quarter), if the last reported sale price of the II-VI Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price on each applicable trading day;
(ii) during the business day period immediately after any consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the II-VI Common Stock and the conversion rate on each such trading day; or
(iii) upon the occurrence of certain specified corporate events.
On or after June 1, 2022 until the close of business on the business day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of II-VI Common Stock or a combination of cash and shares of II-VI Common Stock, at the Company’s election.
Holders of the II-VI Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a II-VI Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited. II-VI Notes were convertible during the quarter ended September 30, 2021; conversions were immaterial. The II-VI Notes are not convertible during the quarter ending December 31, 2022 based upon the II-VI Notes’ conversion features.
The following tables set forth total interest expense recognized related to the II-VI Notes for the three months ended September 30, 2021 and September 30, 2020 ($000):
Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||||
| Amortization of debt discount and debt issuance costs including initial purchaser discount | $ | |||||||||||||||||||||||||
| Interest expense | $ | $ | ||||||||||||||||||||||||
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The effective interest rates on the liability component for the three months ended September 30, 2021 and 2020 presented were 1 % and 5 %, respectively.
Aggregate Availability
The Company had aggregate availability of $450 million under its Revolving Credit Facility as of September 30, 2021.
Weighted Average Interest Rate
The weighted average interest rate of total borrowings was 1 % and 2 % for the three months ended September 30, 2021 and 2020, respectively.
Note 9. Income Taxes
The Company’s year-to-date effective income tax rate at September 30, 2021 was 18 % compared to an effective tax rate of 22 % for the same period in 2020. The variations between the Company’s effective tax rate and the U.S. statutory rate of 21 % were primarily due to tax rate differentials between U.S. and foreign jurisdictions.
U.S. GAAP prescribes the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements which includes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of September 30, 2021 and June 30, 2021, the Company’s gross unrecognized income tax benefit, excluding interest and penalties, was $38 33 million of the gross unrecognized tax benefits at September 30, 2021 would impact the effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions in the income tax provision in the Condensed Consolidated Statements of Earnings. The amount of accrued interest and penalties included in the gross unrecognized income tax benefit was $3
Note 10. Leases
The Company’s lease liabilities are recognized based on the present value of the remaining fixed lease payments, over the lease term, using a discount rate of similarly secured borrowings available to the Company. For the purpose of lease liability measurement, the Company considers only payments that are fixed and determinable at the time of commencement. Any variable payments that depend on an index or rate are expensed as incurred. The Company accounts for non-lease components, such as common area maintenance, as a component of the lease, and includes it in the initial measurement of leased assets and corresponding liabilities. The Company’s lease terms and conditions may include options to extend or terminate. An option is recognized when it is reasonably certain that II-VI will exercise that option.
The Company’s lease assets also include any lease payments made and exclude any lease incentives received prior to commencement. Leased assets are tested for impairment in the same manner as long-lived assets used in operations.
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| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | ||||||||||
| Finance Lease Cost | |||||||||||
| Amortization of right-of-use assets | $ | $ | |||||||||
| Interest on lease liabilities | |||||||||||
| Total finance lease cost | $ | $ | |||||||||
| Operating lease cost | |||||||||||
| Sublease income | |||||||||||
| Total lease cost | $ | $ | |||||||||
| Cash Paid for Amounts Included in the Measurement of Lease Liabilities | |||||||||||
| Operating cash flows from finance leases | $ | $ | |||||||||
| Operating cash flows from operating leases | |||||||||||
| Financing cash flows from finance leases | |||||||||||
| Weighted-Average Remaining Lease Term (in Years) | |||||||||||
| Finance leases | |||||||||||
| Operating leases | |||||||||||
| Weighted-Average Discount Rate | |||||||||||
| Finance leases | |||||||||||
| Operating leases | % | ||||||||||
Note 11. Equity and Redeemable Preferred Stock
Mandatory Convertible Preferred Stock
In July 2020, the Company issued 2,300,000 shares of 6.00 % Series A Mandatory Convertible Preferred, no par value per share (“Mandatory Convertible Preferred Stock”).
Unless previously converted, each outstanding share of Mandatory Convertible Preferred Stock will automatically convert on the Mandatory Conversion Date (as defined in the Statement with Respect to Shares establishing the Mandatory Convertible Preferred Stock) into a number of shares of II-VI Common Stock equal to not more than 4.6512 shares and not less than 3.8760 shares (the "Minimum Conversion Rate"), depending on the applicable market value of the II-VI Common Stock, subject to certain anti-dilution adjustments.
Other than in the event of one of certain fundamental changes, a holder of Mandatory Convertible Preferred Stock may, at any time prior to July 1, 2023, elect to convert such holder's shares, in whole or in part, at a Minimum Conversion Rate per share of Mandatory Convertible Preferred Stock, subject to certain anti-dilution adjustments.
If one of certain fundamental changes occurs on or prior to July 1, 2023, holders of the Mandatory Convertible Preferred Stock will have the right to convert their shares of Mandatory Convertible Preferred Stock, in whole or in part, into shares of II-VI Common Stock at the conversion rate determined in accordance with the terms of the Mandatory Convertible Preferred Stock during the period beginning on, and including, the effective date of such change and ending on, and including, the date that is 20 calendar days after the effective date of such fundamental change (or, if later, the date that is 20 calendar days after holders receive notice of such fundamental change, but in no event later than July 1, 2023). Holders who convert their shares of the Mandatory Convertible Preferred Stock during that period will also receive a dividend make-whole amount and, to the extent there is any, the accumulated dividend amount, in each case as calculated in accordance with the terms of the Mandatory Convertible Preferred Stock.
The Company recognized $7 million of preferred stock dividends during the first quarter of fiscal year 2022, which were presented as a reduction to retained earnings on the Condensed Consolidated Balance Sheet as of September 30, 2021.
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| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | ||||||||||
| Dividends per share | $ | $ | |||||||||
| Series A Mandatory Convertible Preferred Stock dividends ($000) | $ | ||||||||||
Redeemable Convertible Preferred Stock
In March 2021, the Company issued 75,000 shares of II-VI Series B-1 Convertible Preferred Stock, no par value per share. Refer to Note 3. Pending Coherent Acquisition for additional information.
The shares of II-VI Series B-1 Convertible Preferred Stock are convertible into shares of II-VI Common Stock as follows:
•at the election of the holder, at a conversion price of $85 per share (“Conversion Price”) after the earliest to occur of (i) the issuance of shares of II-VI Series B-2 Convertible Preferred Stock upon the Closing, (ii) the termination of the Merger Agreement or (iii) the delivery by II-VI to the Investor of an offer to repurchase the II-VI Series B-1 Convertible Preferred Stock upon the occurrence of a Fundamental Change (as defined in the Statement with Respect to Shares establishing the New II-VI Convertible Preferred Stock); and
•at the election of the Company, any time following March 31, 2024 at the then-applicable Conversion Price if the volume-weighted average price of II-VI Common Stock exceeds 150 % of the then-applicable Conversion Price for 20 trading days out of any 30 consecutive trading days.
The issued shares of II-VI Series B-1 Convertible Preferred Stock currently have voting rights, voting as one class with the II-VI Common Stock, on an as-converted basis, subject to limited exceptions.
On or at any time after March 31, 2031
•each holder has the right to require the Company to redeem all of their II-VI Series B-1 Convertible Preferred Stock, for cash, at a redemption price per share equal to the sum of the Stated Value for such shares (as defined in the Statement with Respect to Shares establishing the New II-VI Convertible Preferred Stock) plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not previously been added to the Stated Value (such price the “Redemption Price,” and such right the “Put Right”), and
•the Company has the right to redeem, in whole or in part, on a pro rata basis from all holders based on the aggregate number of shares of II-VI Series B-1 Convertible Preferred Stock outstanding, for cash, at the Redemption Price.
In connection with any Fundamental Change, and subject to the procedures set forth in the Statement with Respect to Shares establishing the New II-VI Convertible Preferred Stock, the Company must, or will cause the survivor of a Fundamental Change (such survivor of a Fundamental Change, the “Acquirer”) to, make an offer to repurchase, at the option and election of the holder thereof, each share of II-VI Series B-1 Convertible Preferred Stock then-outstanding at a purchase price per share in cash equal to (i) the Stated Value for such shares plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not previously been added to the Stated Value as of the date of repurchase plus (ii) if prior to March 31, 2026, the aggregate amount of all dividends that would have been paid (subject to certain exceptions), from the date of repurchase through March 31, 2026.
If the Company defaults on payment obligation with respect to the II-VI Series B-1 Convertible Preferred Stock and such default is not cured within 30 days, the dividend rate will increase to 8 % per annum and will be increased by an additional 2 % per annum each quarter the Company remains in default, not to exceed 14 % per annum.
The II-VI Series B-1 Convertible Preferred Stock is redeemable for cash outside of the control of the Company upon the exercise of the Put Rights, and upon a Fundamental Change, and is therefore classified as mezzanine equity.
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The II-VI Series B-1 Convertible Preferred Stock is initially measured at fair value less issuance costs, accreted to its redemption value over a 10 -year period (using the effective interest method) with such accretion accounted for as deemed dividends and reductions to Net Earnings Available to Common Shareholders.
The Company recognized $10 million of preferred stock dividends during the fiscal quarter ended September 30, 2021, which were presented as a reduction to retained earnings on the Condensed Consolidated Balance Sheet as of September 30, 2021.
The following table presents dividends per share and dividends recognized for the three months ended September 30, 2021:
| Three Months Ended September 30, 2021 | |||||||||||
| Dividends per share | $ | ||||||||||
| Dividends ($000) | |||||||||||
| Deemed dividends ($000) | |||||||||||
Note 12. Earnings Per Share
Basic earnings per common share is computed by dividing net earnings available to common shareholders by the weighted-average number of shares of common stock outstanding during the period.
Diluted earnings per common share is computed by dividing the diluted earnings available to common shareholders by the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period. The dilutive effect of equity awards is calculated based on the average stock price for each fiscal period, using the treasury stock method. For the three months ended September 30, 2021, diluted shares outstanding include the dilutive effect of the potential shares II-VI Common Stock issuable from stock options, performance and restricted shares, as well as the shares of II-VI Common Stock issuable upon conversion of outstanding convertible debt.
Potentially dilutive shares whose effect would have been antidilutive are excluded from the computation of diluted earnings per common share. For the three months ended September 30, 2021, diluted earnings per share excluded the potentially dilutive effect of the Series A Mandatory Convertible Preferred Stock and the Series B Convertible Preferred Stock (under the If-Converted method), as their effects were anti-dilutive.
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| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Numerator | ||||||||||||||||||||||||||
| Net earnings | $ | $ | ||||||||||||||||||||||||
| Deduct Series A preferred stock dividends | ( | ( | ||||||||||||||||||||||||
| Deduct Series B dividends and deemed dividends | ( | |||||||||||||||||||||||||
| Basic earnings available to common shareholders | $ | $ | ||||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||
| Add back interest on Convertible Senior Notes Due 2022 (net of tax) | $ | $ | ||||||||||||||||||||||||
| Diluted earnings available to common shareholders | $ | $ | ||||||||||||||||||||||||
| Denominator | ||||||||||||||||||||||||||
| Weighted average shares | ||||||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||
| Common stock equivalents | ||||||||||||||||||||||||||
| Diluted weighted average common shares | ||||||||||||||||||||||||||
| Basic earnings per common share | $ | $ | ||||||||||||||||||||||||
| Diluted earnings per common share | $ | $ | ||||||||||||||||||||||||
The following table presents potential shares of II-VI Common Stock excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive (000):
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Series A Mandatory Convertible Preferred Stock | |||||||||||||||||||||||
| Common stock equivalents | |||||||||||||||||||||||
| Series B Redeemable Preferred Stock | |||||||||||||||||||||||
| Total anti-dilutive shares | |||||||||||||||||||||||
Note 13. Segment Reporting
The Company reports its business segments using the “management approach” model for segment reporting. This means that the Company determines its reportable business segments based on the way the chief operating decision maker organizes business segments within the Company for making operating decisions and assessing financial performance.
The Company reports its financial results in the following two segments: (i) Compound Semiconductors, and (ii) Photonic Solutions, and the Company’s chief operating decision maker receives and reviews financial information based on these segments. The Company evaluates business segment performance based upon segment operating income, which is defined as
18
earnings before income taxes, interest and other income or expense. The segments are managed separately due to the market, production requirements and facilities unique to each segment.
The accounting policies are consistent across each segment. To the extent possible, the Company’s corporate expenses and assets are allocated to the segments. The expenses associated with the pending acquisition of Coherent for the three months ended September 30, 2021 have not been allocated to an Operating Segment, and are presented in Unallocated and Other.
The following tables summarize selected financial information of the Company’s operations by segment ($000):
| Three Months Ended September 30, 2021 | |||||||||||||||||||||||
| Photonic Solutions | Compound Semiconductors | Unallocated & Other | Total | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Inter-segment revenues | ( | ||||||||||||||||||||||
| Operating income | ( | ||||||||||||||||||||||
| Interest expense | ( | ||||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Income taxes | ( | ||||||||||||||||||||||
| Net earnings | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Expenditures for property, plant & equipment | |||||||||||||||||||||||
| Segment assets | |||||||||||||||||||||||
| Goodwill | |||||||||||||||||||||||
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||
| Photonic Solutions | Compound Semiconductors | Unallocated & Other | Total | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Inter-segment revenues | ( | ||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | ( | ||||||||||||||||||||||
| Other expense, net | ( | ||||||||||||||||||||||
| Income taxes | ( | ||||||||||||||||||||||
| Net earnings | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Expenditures for property, plant & equipment | |||||||||||||||||||||||
Note 14. Share-Based Compensation
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Share-based compensation expense for the periods indicated was as follows ($000):
Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Stock Options and Cash-Based Stock Appreciation Rights | $ | $ | ||||||||||||||||||||||||
| Restricted Share Awards and Cash-Based Restricted Share Unit Awards | ||||||||||||||||||||||||||
| Performance Share Awards and Cash-Based Performance Share Unit Awards | ||||||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||||
Note 15. Fair Value of Financial Instruments
The FASB defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous markets for the asset and liability in an orderly transaction between market participants at the measurement date. The Company estimates fair value of its financial instruments utilizing an established three-level hierarchy in accordance with U.S. GAAP. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:
•Level 1 –Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active markets.
•Level 2 –Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments.
•Level 3 –Valuation is based upon other unobservable inputs that are significant to the fair value measurements.
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.
The Company entered into an interest rate swap with a notional amount of $1,075 million to limit the exposure to its variable interest rate debt by effectively converting it to a fixed interest rate. The Company receives payments based on the one-month LIBOR and makes payments based on a fixed rate of 1.52 %. The Company receives payments with a floor of 0.00 %. The interest rate swap agreement has an effective date of November 24, 2019, with an expiration date of September 24, 2024. The initial notional amount of the interest rate swap is scheduled to decrease to $825 million in June 2022 and will remain at that amount through the expiration date. The Company designated this instrument as a cash flow hedge and deemed the hedge relationship effective at inception of the contract. The fair value of the interest rate swap of $25 million is recognized in the Condensed Consolidated Balance Sheet within other liabilities as of September 30, 2021. Changes in fair value are recorded within accumulated other comprehensive income on the Condensed Consolidated Balance Sheet and reclassified into the Condensed Consolidated Statement of Earnings as interest expense in the period in which the underlying transaction affects earnings. Cash flows from hedging activities are reported in the Condensed Consolidated Statements of Cash Flows in the same classification as the hedged item, generally as a component of cash flows from operations. The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The interest rate swap is classified as a Level 2 item within the fair value hierarchy.
The Company estimated the fair value of the II-VI Notes and Finisar Notes based on quoted market prices as of the last trading day prior to September 30, 2021; however, the II-VI Notes and Finisar Notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the II-VI Notes and Finisar Notes could be retired or transferred. The Company concluded that this fair value measurement should be categorized within Level 2. The carrying value of the II-VI Notes and Finisar Notes is net of unamortized discount and issuance costs. See Note 8. Debt for details on the Company’s debt facilities.
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| Fair Value | Carrying Value | ||||||||||
| II-VI Notes | $ | $ | |||||||||
| Finisar Notes | |||||||||||
The fair values of cash and cash equivalents are considered Level 1 among the fair value hierarchy and approximate fair value because of the short-term maturity of those instruments. The Company’s borrowings including its lease obligations, excluding the 0.25 % Convertible Notes and the 0.50 % Finisar convertible notes are considered Level 2 among the fair value hierarchy and their principal amounts approximate fair value.
The Company, from time to time, purchases foreign currency forward exchange contracts, that permit it to sell specified amounts of these foreign currencies expected to be received from its export sales, for pre-established U.S. dollar amounts at specified dates. These contracts are entered into to limit transactional exposure to changes in currency exchange rates of export sales transactions in which settlement will occur in future periods and which otherwise would expose the Company, on the basis of its aggregate net cash flows in respective currencies, to foreign currency risk. At September 30, 2021, the Company had foreign currency forward contracts recorded at fair value. The fair values of these instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts. No foreign currency gain or loss related to these contracts was realized for the three months ended September 30, 2021.
Note 16. Share Repurchase Programs
Note 17. Accumulated Other Comprehensive Income
| Foreign Currency Translation Adjustment | Interest Rate Swap | Defined Benefit Pension Plan | Total Accumulated Other Comprehensive Income | ||||||||||||||||||||
AOCI - June 30, 2021 | $ | $ | ( | $ | ( | $ | |||||||||||||||||
| Other comprehensive income before reclassifications | ( | ( | ( | ||||||||||||||||||||
| Amounts reclassified from AOCI | |||||||||||||||||||||||
| Net current-period other comprehensive income | ( | ( | |||||||||||||||||||||
| AOCI - September 30, 2021 | $ | $ | ( | $ | ( | $ | |||||||||||||||||
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding projected growth rates, markets, product development, financial position, capital expenditures and foreign currency exposure. Forward-looking statements are also identified by words such as “expects,” “anticipates,” “intends,” “plans,” “projects” or similar expressions.
Although our management considers the expectations and assumptions on which the forward-looking statements in this Quarterly Report on Form 10-Q are based to have a reasonable basis, there can be no assurance that management’s
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expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or prove to be correct. In addition to general industry and global economic conditions, factors that could cause actual results to differ materially from those discussed in the forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to: (i) the failure of any one or more of the expectations or assumptions on which such forward-looking statements are based to prove to be correct; and (ii) the risks relating to forward-looking statements and other “Risk Factors” discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021 and in the Company's other reports filed with the Securities and Exchange Commission. The Company disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or developments, or otherwise.
In addition, we operate in a highly competitive and rapidly changing environment; new risk factors can arise, and it is not possible for management to anticipate all such risk factors, or to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statement. The forward-looking statements included in this Quarterly Report on Form 10-Q are based only on information currently available to us and speak only as of the date of this Report. We do not assume any obligation, and do not intend to, update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the securities laws. Investors should, however, consult any further disclosures of a forward-looking nature that the Company may make in its subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, or other disclosures filed with or furnished to the SEC.
Investors should also be aware that, while the Company does communicate with securities analysts from time to time, such communications are conducted in accordance with applicable securities laws. Investors should not assume that the Company agrees with any statement, conclusion of any analysis, or report issued by any analyst irrespective of the content of the statement or report.
Overview
II-VI Incorporated (“II-VI,” the “Company,” “we,” “us” or “our”), a worldwide leader in engineered materials and opto-electronic components, is a vertically integrated manufacturing company that develops innovative products for communications, industrial, aerospace and defense, consumer electronics, semiconductor capital equipment, life sciences and automotive end markets. The Company produces a wide variety of application-specific photonic and electronic materials and components, and deploys them in various forms, including integration with advanced software.
The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing a broad portfolio of products for our end markets. We also generate revenue, earnings and cash flows from government-funded research and development contracts relating to the development and manufacture of new technologies, materials and products.
Our customer base includes original equipment manufacturers, laser end users, system integrators of high-power lasers, manufacturers of equipment and devices for industrial, optical communications, consumer electronics, security and monitoring applications, U.S. government prime contractors, and various U.S. government agencies.
As we grow, we are focused on scaling our company and deriving the continued benefits of vertical integration as we strive to be a best in class competitor in all of our highly competitive markets. The Company may elect to change the way in which the Company operates or is organized in the future to enable the most efficient implementation of our strategy.
Pending Coherent Acquisition
On March 25, 2021, II-VI, Coherent, Inc. (“Coherent”) and Watson Merger Sub Inc., a wholly owned subsidiary of II-VI (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, Merger Sub will be merged with and into Coherent, and Coherent will continue as the surviving corporation in the merger and wholly owned subsidiary of II-VI (the “Merger”).
Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, at the effective time of the Merger (the “Effective Time”), each share of common stock of Coherent (the “Coherent Common Stock”) issued and outstanding immediately prior to the Effective Time will be canceled and extinguished and automatically converted into the right to receive the following consideration (collectively, the “Merger Consideration”): (A) $220.00 in cash, without interest (the “Cash Consideration”), and (B) 0.91 of a validly issued, fully paid and nonassessable share of our common stock of II-VI.
Pursuant to the terms of the Merger Agreement, each Coherent restricted stock unit award (a “Coherent RSU”), other than Director RSUs (as defined below), outstanding immediately prior to the Effective Time will be automatically converted into
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time-based restricted stock units denominated in shares of II-VI Common Stock entitling the holder to receive, upon settlement, a number of shares of II-VI Common Stock equal to the number of shares of Coherent Common Stock subject to the Coherent RSU multiplied by the sum of (A) 0.91, and (B) the quotient obtained by dividing the Cash Consideration by the volume weighted average price of a share of II-VI Common Stock for a 10 trading day period ending prior to the closing of the Merger (the “Closing”). For Coherent RSUs subject to performance-based vesting conditions and metrics, the number of shares of II-VI Common Stock subject to the converted Coherent RSUs will be determined after giving effect to the Coherent Board of Directors’ determination of the number of Coherent RSUs earned, based on the greater of the target or actual level of achievement of such goals or metrics immediately prior to the Effective Time.
The converted Coherent RSUs generally will be subject to the same terms and conditions that applied to the awards immediately prior to the Effective Time, provided that any Coherent RSUs subject to performance-based vesting conditions will be subject solely to time-and service-based vesting. Each Coherent RSU that is outstanding as of the date of the Merger Agreement and as of immediately prior to the Effective Time will be entitled to certain vesting acceleration benefits.
Each Coherent RSU granted to a non-employee member of Coherent’s Board of Directors (“Director RSUs”) (whether or not vested) that is outstanding immediately prior to the Effective Time will automatically vest in full and be canceled and converted into the right to receive the Merger Consideration as if such Director RSU had been settled in shares of Coherent Common Stock immediately prior to the Effective Time.
The Boards of Directors of II-VI and Coherent unanimously approved the Merger and the Merger Agreement. II-VI filed with the SEC a registration statement on Form S-4 relating to the Merger, and the SEC declared that registration statement to be effective on May 6, 2021. Shareholders of II-VI and stockholders of Coherent voted to approve proposals related to the Merger at special meetings held on June 24, 2021 by the respective companies.
The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions, including review and approval of the Merger by the State Administration for Market Regulation in China. Subject to the satisfaction or waiver of each of the closing conditions, II-VI expects that the Merger will be completed in the first calendar quarter of 2022. However, it is possible that factors outside the control of both companies could result in the Merger being completed at a different time or not at all.
In connection with entering into the Merger Agreement, II-VI has obtained a fully underwritten financing commitment pursuant to a commitment letter (the “Commitment Letter”), dated as of March 25, 2021, as further amended and restated on April 21, 2021, with JPMorgan Chase Bank, N.A., Citigroup Global Markets Inc., MUFG Bank, Ltd., MUFG Securities Americas Inc., PNC Capital Markets LLC, PNC Bank, National Association, HSBC Securities (USA) Inc., HSBC Bank USA, National Association, Citizens Bank, N.A., Mizuho Bank, Ltd., BMO Capital Markets Corp., Bank of Montreal, TD Securities (USA) LLC, The Toronto-Dominion Bank, New York Branch, TD Bank, N.A. and First National Bank of Pennsylvania (collectively, the “Commitment Parties”) pursuant to which the Commitment Parties have committed to provide up to $5.125 billion in debt financing. II-VI and the Commitment Parties amended and restated the Commitment Letter on October 25, 2021 (the “Amended and Restated Commitment Letter”) to effect certain amendments thereto, including to reduce the total amounts of commitments thereunder to $4.99 billion. The obligation of the Commitment Parties to provide the debt financing provided for in the Amended and Restated Commitment Letter is subject to a number of customary conditions.
In connection with entering into the Merger Agreement, II-VI entered into an Amended and Restated Investment Agreement, dated as of as of March 30, 2021, (the "Investment Agreement"), with BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital Private Equity, LP (the “Investor”). Pursuant to the terms of the Investment Agreement, on March 31, 2021, II-VI issued, sold, and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock of the Company (“II-VI Series B-1 Convertible Preferred Stock”) for $10,000 per share (the “Equity Per Share Price”), resulting in an aggregate purchase price of
$750 million. Subject to the terms and conditions of the Investment Agreement, among other things, the Company and the Investor also agreed that the company would issue, sell and deliver to the Investor:
•105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company (“II-VI Series B-2 Convertible Preferred Stock”) for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate purchase price of $1.1 billion, immediately prior to Closing; and
•immediately prior to Closing, if elected by the Company and agreed by the Investor, up to an additional 35,000 shares of II-VI Series B-2 Convertible Preferred Stock (the "Upsize Shares") for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate maximum purchase price for the Upsize Shares of $350 million.
Following the Company’s provision of notice to the Investor of its election to offer the Upsize Shares, the Investor informed the Company on June 8, 2021 of its agreement to purchase the Upsize Shares from the Company immediately prior to the Closing, increasing the Investor’s total equity commitment to II-VI pursuant to the Investment Agreement to $2.2 billion.
The expenses associated with the pending acquisition for the three months ended September 30, 2021, have not been allocated to an Operating Segment, and are presented in the Unallocated and Other within this Quarterly Report.
Critical Accounting Estimates
The preparation of financial statements and related disclosures are in conformity with accounting principles generally accepted in the United States of America and the Company’s discussion and analysis of its financial condition and results of operations require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K dated August 20, 2021 describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements.
New Accounting Standards
See Note 2. Recently Issued Accounting Pronouncements to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.
COVID-19 Update
On March 11, 2020, the World Health Organization designated the novel coronavirus disease known as COVID-19 as a global pandemic. In response to the global spread of COVID-19, governments at various levels have implemented unprecedented response measures. Overall, the COVID-19 pandemic has significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets. Certain of the measures taken in response to the COVID-19 pandemic have adversely affected, and could in the future materially adversely impact, our business, results of operations, financial condition and stock price. In particular, the COVID-19 pandemic continues to have a significant impact on global trade, which has resulted in supply chain and production disruptions impacting our business.
Our focus has been on the protection of the health and safety of our employees and business partners. In our facilities, we have deployed new safety measures, including guidance to employees on matters such as effective hygiene and disinfection, social distancing, limited and remote access working where feasible and use of protective equipment. We also are prioritizing efforts to understand and support the changing business needs of our customers and suppliers in light of restrictions that are applicable to them.
In addition, our supply chain has been affected by measures implemented in response to the pandemic and in certain cases, our suppliers have not had the materials, capacity or capability to supply us with the components necessary for continuing our manufacturing operations or development efforts at our normal levels. There are also restrictions and delays on logistics, such as air cargo carriers, as well as increased logistics costs due to limited capacity and high demands for freight forwarders. Similarly, our customers have also experienced, and could continue to experience, disruptions in their operations, which may result in reduced, delayed, or canceled orders, and has increased collection risks, which may adversely affect our results of operations.
The full extent of the impact of the COVID-19 pandemic and the related responses on our operational and financial performance remains uncertain and will depend on many factors outside our control, including, without limitation, the duration and severity of the pandemic, the imposition of protective public safety measures, and the impact of the pandemic on the global
economy as a whole and, in particular, demand for our products. Due to these uncertainties, we cannot reasonably estimate the related impact on us at this time.
For additional information regarding the risks that we face as a result of the COVID-19 pandemic, please see Item 1A, Risk Factors, in the Annual Report on Form 10-K for the year ended June 30, 2021. Further, to the extent the COVID-19 pandemic adversely affects our business and financial results, it also may have the effect of heightening many of the other risks described in the risk factors in the Annual Report on Form 10-K for the year ended June 30, 2021 and in our subsequent filings with the Securities and Exchange Commission.
Results of Operations ($ in millions, except per share data)
The following tables set forth select items from our Condensed Consolidated Statements of Earnings for the three months ended September 30, 2021 and 2020 ($ in millions):
| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | ||||||||||||||||||||||
| % of Revenues | % of Revenues | ||||||||||||||||||||||
| Total revenues | $ | 795 | 100 | % | $ | 728 | 100 | % | |||||||||||||||
| Cost of goods sold | 479 | 60 | 442 | 61 | |||||||||||||||||||
| Gross margin | 316 | 40 | 287 | 39 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Internal research and development | 89 | 11 | 78 | 11 | |||||||||||||||||||
| Selling, general and administrative | 132 | 17 | 107 | 15 | |||||||||||||||||||
| Interest and other, net | 5 | 1 | 42 | 6 | |||||||||||||||||||
| Earnings before income taxes | 90 | 11 | 60 | 8 | |||||||||||||||||||
| Income taxes | 16 | 2 | 13 | 2 | |||||||||||||||||||
| Net earnings | $ | 74 | 9 | % | $ | 46 | 6 | % | |||||||||||||||
| Diluted earnings per share | $ | 0.50 | $ | 0.38 | |||||||||||||||||||
Consolidated
Revenues. Revenues for the three months ended September 30, 2021 increased 9% to $795 million, compared to $728 million for the same period last fiscal year. The Company realized increased revenues within its product lines for industrial and communications, semiconductor capital equipment and consumer electronics markets.
Gross margin. Gross margin for the three months ended September 30, 2021 was $316 million, or 40% of total revenues, compared to $287 million, or 39% of total revenues, for the same period last fiscal year. The increase in gross margin of 40 basis points for the three months ended September 30, 2021 was driven by higher volume in both segments and improved mix of products sold.
Internal research and development. Internal research and development (“IR&D”) expenses for the three months ended September 30, 2021 were $89 million, or 11% of revenues, compared to $78 million, or 11% of revenues, for the same period last fiscal year. The higher IR&D is a result of increased investments in power electronics and sensing products.
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2021 were $132 million, or 17% of revenues, compared to $107 million, or 15% of revenues, for the same period last fiscal year. The increase in SG&A as a percentage of revenue for the three months ended September 30, 2021 compared to the same period last fiscal year was primarily the result of transaction costs incurred in the current year related to the pending Coherent acquisition of $12 million, as compared to $2 million during the same period last fiscal year, primarily related to the Ascatron acquisition. The other driver of the increase in SG&A is an increase in stock compensation as a result of the increase in the stock price.
Interest and other, net. Interest and other, net for the three months ended September 30, 2021 was expense of $5 million, compared to expense of $42 million for the same period last fiscal year. Included in interest and other, net, were interest expense on borrowings, equity earnings from unconsolidated investments, foreign currency gains and losses, expense of debt issuance costs, and interest income on excess cash balances. For the three months ended September 30, 2021, interest and other,
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net decreased by $37 million in comparison to the same period last fiscal year, driven by $25 million of debt extinguishment expense recognized in the prior year, and a favorable foreign currency fluctuation year over year of approximately $10 million. There were foreign currency gains of $5 million for the current three-month period, compared to $5 million of losses for the three months ended September 30, 2020.
Income taxes. The Company’s year-to-date effective income tax rate at September 30, 2021 was 18%, compared to an effective tax rate of 22% for the same period last fiscal year. The variations between the Company’s effective tax rate and the U.S. statutory rate of 21% were primarily due to tax rate differentials between U.S. and foreign jurisdictions.
Segment Reporting
Revenues and operating income for the Company’s reportable segments are discussed below. Operating income differs from net earnings in that operating income excludes certain operational expenses included in other expense (income) – net as reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance over which management has direct control and is used by management in its evaluation of segment performance. See Note 13. Segment Reporting, to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the Company’s reportable segments and for the reconciliation of the Company’s operating income to net earnings, which is incorporated herein by reference.
Photonic Solutions ($ in millions)
| Three Months Ended September 30, | % Increase | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Revenues | $ | 536 | $ | 498 | 8% | ||||||||||||||||||||||||||||||
| Operating income | $ | 57 | $ | 50 | 12% | ||||||||||||||||||||||||||||||
Revenues for the three months ended September 30, 2021 increased 8% to $536 million, compared to $498 million for the same period last fiscal year. The increase in revenue during the three months ended September 30, 2021 was primarily due to sustained demand for products in the optical communications market, including datacom and telecom products.
Operating income for the three months ended September 30, 2021 increased 12% to $57 million, compared to operating income of $50 million for the same period last fiscal year. The increase in operating income was driven by the increase in volume and improved mix of products sold.
Compound Semiconductors ($ in millions)
| Three Months Ended September 30, | % Increase | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Revenues | $ | 259 | $ | 230 | 12% | ||||||||||||||||||||||||||||||
| Operating income | $ | 50 | $ | 51 | (2)% | ||||||||||||||||||||||||||||||
Revenues for the three months ended September 30, 2021 for Compound Semiconductors increased 12% to $259 million, compared to revenues of $230 million for the same period last fiscal year. The increase in revenues during the three months ended September 30, 2021 primarily related to the increase in product shipments addressing the industrial market, the semiconductor capital equipment market and the consumer electronics market, with declines in aerospace and defense.
Operating income for the three months ended September 30, 2021 remained flat compared to the same period last fiscal year. Investment in IR&D offset higher volume and improved margins.
Liquidity and Capital Resources
Historically, our primary sources of cash have been from operations, long-term borrowing, and advance funding from customers. Other sources of cash include proceeds from the issuance of equity, proceeds received from the exercises of stock options, and sale of equity investments and businesses. Our historic uses of cash have been for capital expenditures, investment in research and development, business acquisitions, payments of principal and interest on outstanding debt obligations, payments of debt and equity issuance costs to obtain financing and payments in satisfaction of employees’ minimum tax
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obligations. Supplemental information pertaining to our sources and uses of cash for the periods indicated is presented as follows:
Sources (uses) of cash (millions):
| Three Months Ended Sept 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net cash provided by operating activities | $ | 52 | $ | 134 | |||||||
| Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan | 8 | 1 | |||||||||
| Purchases of businesses, net of cash acquired | — | (36) | |||||||||
| Net proceeds from equity issuance | — | 884 | |||||||||
| Other items | (1) | — | |||||||||
| Effect of exchange rate changes on cash and cash equivalents and other items | (1) | 2 | |||||||||
| Payments in satisfaction of employees' minimum tax obligations | (13) | (6) | |||||||||
| Payment of dividends | (14) | — | |||||||||
| Payments under long-term borrowings and credit facility | (16) | (755) | |||||||||
| Additions to property, plant & equipment | (48) | (34) | |||||||||
Operating activities:
Net cash provided by operating activities was $52 million for the three-months ended September 30, 2021 compared to $134 million of net cash provided by operating activities for the same period last fiscal year. The decrease in cash flows provided by operating activities during the three months ended September 30, 2021 compared to the same period last fiscal year was primarily due to increased working capital requirements to accommodate the Company's current increased business activities.
Investing activities:
Net cash used in investing activities was $48 million for the three months ended September 30, 2021, compared to net cash used of $70 million for the same period last fiscal year. Cash used to fund capital expenditures increased by $14 million year over year, to continue to increase capacity to meet the growing demand for the Company’s product portfolio. Net cash used in investing activities for the three months ended September 30, 2020 was used to fund the acquisitions of Ascatron AB and Innovion Corporation.
Financing activities:
Net cash used by financing activities was $36 million for the three months ended September 30, 2021, compared to net cash provided by financing activities of $123 million for the same period last fiscal year. Cash outflow for the current period was primarily comprised of payments on the Term A facility and payment of cash dividends. Net cash provided by financing activities in the prior year primarily consisted of payment on the Term B facility, offset by proceeds from the issuance of Common and Preferred shares.
Senior Credit Facilities
The Company currently has Senior Credit Facilities with Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lenders party thereto.
The credit agreement governing the Senior Credit Facilities (the "Credit Agreement") provides for senior secured financing of $2.425 billion in the aggregate, consisting of
(i)Aggregate principal amount of $1,255 million for a five-year senior secured first-lien term A loan facility (the “Term A Facility”),
(ii)Aggregate principal amount of $720 million for a seven-year senior secured term B loan facility (the “Term B Facility” and together with the Term A Facility, the “Term Loan Facilities”), which was repaid in full during the quarter ended September 30, 2020, and
(iii)Aggregate principal amount of $450 million for a five-year senior secured first-lien revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “Senior Credit Facilities”).
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The Credit Agreement also provides for a letter of credit sub-facility not to exceed $25 million and a swing loan sub-facility initially not to exceed $20 million.
The Term B Facility was repaid in full by the Company in fiscal year 2021.
The Company is obligated to repay the outstanding principal amount of the Term A Facility in quarterly installments equal to 1.25% of the initial aggregate principal amount of the Term A Facility, with the remaining outstanding balance due and payable on the fifth anniversary of September 24, 2019 (the "Finisar Closing Date").
The Company’s obligations under the Senior Credit Facilities are guaranteed by each of the Company’s existing or future direct and indirect domestic subsidiaries (collectively, the “Guarantors”). Borrowings under the Senior Credit Facilities are collateralized by a first priority lien in substantially all of the assets of the Company and the Guarantors, except that no real property is collateral under the Senior Credit Facilities.
All amounts outstanding under the Senior Credit Facilities become due and payable 120 days prior to the maturity of the Company’s currently outstanding 0.25% Convertible Senior Notes due 2022 (the “II-VI Notes”) if (i) the II-VI Notes remain outstanding, and (ii) the Company has insufficient cash and borrowing availability to repay the principal amount of the II-VI Notes.
Amounts outstanding under the Senior Credit Facilities bear interest at a rate per annum equal to an applicable margin over a eurocurrency rate or an applicable margin over a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) Bank of America, N.A.’s prime rate and (c) a eurocurrency rate plus 1.00%, in each case as calculated in accordance with the terms of the Credit Agreement. The applicable interest rate would increase under certain circumstances relating to events of default. The Company has entered into an interest rate swap contract to hedge its exposure to interest rate risk on its variable rate borrowings under the Senior Credit Facilities. Refer to Note 15 for further information regarding this interest rate swap.
The Credit Agreement contains customary affirmative and negative covenants with respect to the Senior Credit Facilities, including limitations with respect to liens, investments, indebtedness, dividends, mergers and acquisitions, dispositions of assets and transactions with affiliates. The Company will be obligated to maintain a consolidated interest coverage ratio (as calculated in accordance with the terms of the Credit Agreement) as of the end of each fiscal quarter of not less than 3.00 to 1.00. The Company will be obligated to maintain a consolidated total net leverage ratio (as calculated in accordance with the terms of the Credit Agreement) of not greater than (i) 5.00 to 1.00 for the first four fiscal quarters after the Finisar Closing Date, commencing with the first full fiscal quarter after the Finisar Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through and including the eighth fiscal quarter after the Finisar Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As of September 30, 2021 the Company was in compliance with all financial covenants under the Credit Agreement.
Additional information regarding the Senior Credit Facilities and certain of the Company's other indebtedness is set forth in Note 8. Debt to our unaudited condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
The Company is exposed to market risks arising from adverse changes in foreign currency exchange rates. In the normal course of business, the Company uses a variety of techniques and derivative financial instruments as part of its overall risk management strategy, which is primarily focused on its exposure in relation to the Japanese Yen, Chinese Renminbi, Swiss Franc, and the Malaysian Ringgit. No significant changes have occurred in the techniques and instruments used.
Interest Rate Risks
As of September 30, 2021, the Company’s total borrowings include variable rate borrowings, which exposes the Company to changes in interest rates. On November 24, 2019, the Company entered into an interest rate swap contract to limit the exposure of its variable interest rate debt by effectively converting it to fixed interest rate debt. If the Company had not effectively hedged its variable rate debt, a change in the interest rate of 100 basis points on these variable rate borrowings would have resulted in additional interest expense of $11 million for the three months ended September 30, 2021.
Item 4. CONTROLS AND PROCEDURES
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Evaluation of Disclosure Controls and Procedures
The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer and Treasurer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. The Company’s disclosure controls were designed to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control over Financial Reporting
No changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) were implemented during the Company’s most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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Part II – Other Information
Item 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved from time to time in various claims, lawsuits, and regulatory proceedings incidental to its business. The resolution of each of these matters is subject to various uncertainties, and it is possible that these matters may be resolved unfavorably to the Company. Management believes, after consulting with legal counsel, that the ultimate liabilities, if any, resulting from these legal and regulatory proceedings will not materially affect the Company’s financial condition, liquidity or results of operations.
Item 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2021, any of which could materially affect our business, financial condition or future results. Those risk factors are not the only risks facing the Company. Additional risks and uncertainties not currently known or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. ISSUER PURCHASES OF EQUITY SECURITIES
In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its Common Stock through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the Company are retained as treasury stock and available for general corporate purposes. As of September 30, 2021, the Company has cumulatively purchased 1,416,587 shares of its Common Stock pursuant to the Program for approximately $22 million. The dollar value of shares that may yet be purchased under the Program is approximately $28 million.
The following table sets forth repurchases of our Common Stock during the quarter ended September 30, 2021:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Dollar Value of Shares That May Yet be Purchased Under the Plan or Program | ||||||||||||||||||||||
| July 1, 2021 to July 31, 2021 | — | $ | — | — | $ | 27,658,759 | ||||||||||||||||||||
| August 1, 2021 to August 31, 2021 | 198,843 | (1) | $ | 63.60 | — | $ | 27,658,759 | |||||||||||||||||||
| September 1, 2021 to September 30, 2021 | 6,033 | (1) | $ | 61.49 | — | $ | 27,658,759 | |||||||||||||||||||
| Total | 204,876 | $ | 63.54 | — | ||||||||||||||||||||||
(1)Represents shares of Common Stock transferred to the Company from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock awards.
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Item 6. EXHIBITS
| Exhibit Number | Description of Exhibit | Reference | ||||||||||||
| 31.01 | Filed herewith. | |||||||||||||
| 31.02 | Filed herewith. | |||||||||||||
| 32.01 | Furnished herewith. | |||||||||||||
| 32.02 | Furnished herewith. | |||||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document | |||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||
| 104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| II-VI INCORPORATED | ||||||||
| (Registrant) | ||||||||
| Date: November 9, 2021 | By: | /s/ Vincent D. Mattera, Jr. | ||||||
| Vincent D. Mattera, Jr Chief Executive Officer | ||||||||
| Date: November 9, 2021 | By: | /s/ Mary Jane Raymond | ||||||
| Mary Jane Raymond Chief Financial Officer and Treasurer | ||||||||
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