COHERENT CORP. - Quarter Report: 2021 March (Form 10-Q)
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 March 31, 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
________________________________________________________________
II-VI INCORPORATED
(Exact name of registrant as specified in its charter)
________________________________________________________________
| PENNSYLVANIA | 25-1214948 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 375 Saxonburg Boulevard | 16056 | ||||||||||
| Saxonburg, | PA | (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 | ||||||
| Common Stock, no par value | IIVI | Nasdaq Global Select Market | ||||||
| Series A Mandatory Convertible Preferred Stock, no par value | IIVIP | Nasdaq Global Select Market | ||||||
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.:
| Large accelerated filer | ☒ | 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 May 5, 2021, 104,884,278 shares of Common Stock, no par value, of the registrant were outstanding.
II-VI INCORPORATED
INDEX
| Page No. | |||||||||||
Condensed Consolidated Balance Sheets – March 31, 2021 and June 30, 2020 (Unaudited) | |||||||||||
Condensed Consolidated Statements of Earnings (Loss) – Three and nine months ended March 31, 2021 and 2020 (Unaudited) | |||||||||||
Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and nine months ended March 31, 2021 and 2020 (Unaudited) | |||||||||||
Condensed Consolidated Statements of Cash Flows – Nine months ended March 31, 2021 and 2020 (Unaudited) | |||||||||||
Condensed Consolidated Statements of Shareholders’ Equity – Three and nine months ended March 31, 2021 and 2020 | |||||||||||
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
II-VI Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($000)
| March 31, 2021 | June 30, 2020 | ||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 1,535,310 | $ | 493,046 | |||||||
Accounts receivable - less allowance for doubtful accounts of $1,095 at March 31, 2021 and $1,698 at June 30, 2020 | 615,163 | 598,124 | |||||||||
| Inventories | 673,744 | 619,810 | |||||||||
| Prepaid and refundable income taxes | 9,133 | 12,279 | |||||||||
| Prepaid and other current assets | 55,416 | 65,710 | |||||||||
| Total Current Assets | 2,888,766 | 1,788,969 | |||||||||
| Property, plant & equipment, net | 1,232,146 | 1,214,772 | |||||||||
| Goodwill | 1,293,512 | 1,239,009 | |||||||||
| Other intangible assets, net | 739,489 | 758,368 | |||||||||
| Deferred income taxes | 36,191 | 22,938 | |||||||||
| Other assets | 171,616 | 210,658 | |||||||||
| Total Assets | $ | 6,361,720 | $ | 5,234,714 | |||||||
| Liabilities, Mezzanine Equity and Shareholders' Equity | |||||||||||
| Current Liabilities | |||||||||||
| Current portion of long-term debt | $ | 62,050 | $ | 69,250 | |||||||
| Accounts payable | 277,616 | 268,773 | |||||||||
| Accrued compensation and benefits | 141,527 | 157,557 | |||||||||
| Operating lease current liabilities | 23,264 | 24,634 | |||||||||
| Accrued income taxes payable | 32,559 | 33,341 | |||||||||
| Other accrued liabilities | 141,821 | 119,338 | |||||||||
| Total Current Liabilities | 678,837 | 672,893 | |||||||||
| Long-term debt | 1,323,402 | 2,186,092 | |||||||||
| Deferred income taxes | 66,861 | 45,551 | |||||||||
| Operating lease liabilities | 110,223 | 94,701 | |||||||||
| Other liabilities | 141,049 | 158,674 | |||||||||
| Total Liabilities | 2,320,372 | 3,157,911 | |||||||||
| Mezzanine Equity | |||||||||||
Series B redeemable convertible preferred stock, no par value, 5% cumulative; authorized - 215,000 shares; issued - 75,000 shares at March 31, 2021, redemption value - $750,100 | 716,200 | — | |||||||||
| Shareholders' Equity | |||||||||||
Series A preferred stock, no par value, 6% cumulative; authorized - 5,000,000 shares; issued - 2,300,000 shares at March 31, 2021 | 445,319 | — | |||||||||
Common stock, no par value; authorized - 300,000,000 shares; issued - 118,369,820 shares at March 31, 2021; 105,916,068 shares at June 30, 2020 | 2,011,210 | 1,486,947 | |||||||||
Accumulated other comprehensive income (loss) | 4,501 | (87,383) | |||||||||
| Retained earnings | 1,071,362 | 876,552 | |||||||||
| 3,532,392 | 2,276,116 | ||||||||||
Treasury stock, at cost; 13,489,953 shares at March 31, 2021 and 13,356,447 shares at June 30, 2020 | (207,244) | (199,313) | |||||||||
| Total Shareholders' Equity | 3,325,148 | 2,076,803 | |||||||||
| Total Liabilities, Mezzanine Equity and Shareholders' Equity | $ | 6,361,720 | $ | 5,234,714 | |||||||
- 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 March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues | $ | 783,232 | $ | 627,041 | |||||||
| Costs, Expenses, and Other Expense (Income) | |||||||||||
| Cost of goods sold | 483,676 | 381,108 | |||||||||
| Internal research and development | 83,231 | 94,764 | |||||||||
| Selling, general and administrative | 131,244 | 82,133 | |||||||||
| Interest expense | 13,034 | 28,530 | |||||||||
| Other expense (income), net | (21,432) | 7,168 | |||||||||
| Total Costs, Expenses, & Other Expense (Income) | 689,753 | 593,703 | |||||||||
| Earnings Before Income Taxes | 93,479 | 33,338 | |||||||||
| Income Tax Expense | 12,387 | 27,417 | |||||||||
| Net Earnings | $ | 81,092 | $ | 5,921 | |||||||
| Less: Dividends on Preferred Stock | $ | 7,013 | $ | — | |||||||
| Net Earnings available to the Common Shareholders | $ | 74,079 | $ | 5,921 | |||||||
| Basic Earnings Per Share | $ | 0.71 | $ | 0.07 | |||||||
| Diluted Earnings Per Share | $ | 0.66 | $ | 0.06 | |||||||
- See notes to condensed consolidated financial statements.
4
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Earnings (Loss) (Unaudited)
($000, except per share data)
| Nine Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues | $ | 2,297,885 | $ | 1,633,781 | |||||||
| Costs, Expenses, and Other Expense (Income) | |||||||||||
| Cost of goods sold | 1,389,299 | 1,116,368 | |||||||||
| Internal research and development | 246,337 | 238,584 | |||||||||
| Selling, general and administrative | 357,323 | 306,846 | |||||||||
| Interest expense | 45,833 | 63,888 | |||||||||
| Other expense (income), net | (246) | 12,734 | |||||||||
| Total Costs, Expenses, & Other Expense (Income) | 2,038,546 | 1,738,420 | |||||||||
| Earnings (Loss) Before Income Taxes | 259,339 | (104,639) | |||||||||
| Income Tax Expense | 44,081 | 13,651 | |||||||||
| Net Earnings (Loss) | $ | 215,258 | $ | (118,290) | |||||||
| Less: Dividends on Preferred Stock | $ | 20,353 | $ | — | |||||||
| Net Earnings (Loss) available to the Common Shareholders | $ | 194,905 | $ | (118,290) | |||||||
| Basic Earnings (Loss) Per Share | $ | 1.88 | $ | (1.43) | |||||||
| Diluted Earnings (Loss) Per Share | $ | 1.78 | $ | (1.43) | |||||||
5
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
($000)
| Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net earnings (loss) | $ | 81,092 | $ | 5,921 | $ | 215,258 | $ | (118,290) | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments | (18,400) | (39,829) | 81,191 | (28,258) | |||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $2,299 and $2,929 for the three and nine months ended March 31, 2021, respectively, and $(8,475) and $(7,486) for the three and nine months ended March 31, 2020 | 8,394 | (31,407) | 10,693 | (27,798) | |||||||||||||||||||
Pension adjustment, net of taxes of ($46) for the nine months ended March 31, 2020 | — | — | — | (167) | |||||||||||||||||||
| Comprehensive income (loss) | $ | 71,086 | $ | (65,315) | $ | 307,142 | $ | (174,513) | |||||||||||||||
- See notes to condensed consolidated financial statements.
6
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
($000)
| Nine Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net earnings (loss) | $ | 215,258 | $ | (118,290) | |||||||
| Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation | 138,300 | 101,755 | |||||||||
| Amortization | 61,570 | 45,369 | |||||||||
| Share-based compensation expense | 54,417 | 48,916 | |||||||||
| Amortization of discount on convertible debt and debt issuance costs | 15,512 | 15,920 | |||||||||
| Debt extinguishment costs | 24,747 | 3,960 | |||||||||
| Losses on foreign currency remeasurements and transactions | 4,260 | 8,149 | |||||||||
| Earnings from equity investments | (2,011) | (1,777) | |||||||||
| Deferred income taxes | (2,959) | (32,698) | |||||||||
| Impairment of investment | — | 4,980 | |||||||||
| Increase (decrease) in cash from changes in (net of effect of acquisitions): | |||||||||||
| Accounts receivable | (8,454) | 16,750 | |||||||||
| Inventories | (27,155) | 95,598 | |||||||||
| Accounts payable | (2,320) | (8,480) | |||||||||
| Income taxes | (7,592) | (11,178) | |||||||||
| Accrued compensation and benefits | (16,030) | (12,330) | |||||||||
| Other operating net assets (liabilities) | (691) | (36,152) | |||||||||
| Net cash provided by operating activities | 446,852 | 120,492 | |||||||||
| Cash Flows from Investing Activities | |||||||||||
| Additions to property, plant & equipment | (105,331) | (107,975) | |||||||||
| Purchases of businesses, net of cash acquired | (34,431) | (1,036,609) | |||||||||
| Other investing activities | (1,057) | (3,042) | |||||||||
| Net cash used in investing activities | (140,819) | (1,147,626) | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Proceeds from issuance of common shares | 460,000 | — | |||||||||
| Proceeds from issuance of Series A preferred shares | 460,000 | — | |||||||||
| Proceeds from issuance of Series B preferred shares | 750,000 | — | |||||||||
| Proceeds from borrowings of Term A Facility | — | 1,241,000 | |||||||||
| Proceeds from borrowings of Term B Facility | — | 720,000 | |||||||||
| Proceeds from borrowings of Revolving Credit Facility | — | 160,000 | |||||||||
| Proceeds from borrowings under prior Credit Facility | — | 10,000 | |||||||||
| Payments on Finisar Notes | — | (560,112) | |||||||||
| Payments on borrowings under prior Term Loan, Credit Facility and other loans | — | (176,596) | |||||||||
| Payments on borrowings under Term A Facility | (121,538) | (31,026) | |||||||||
| Payments on borrowings under Term B Facility | (714,600) | (3,600) | |||||||||
| Payments on borrowings under Revolving Credit Facility | (74,000) | (70,000) | |||||||||
| Debt issuance costs | — | (63,510) | |||||||||
| Equity issuance costs | (58,596) | — | |||||||||
| Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan | 31,562 | 5,056 | |||||||||
| Common stock repurchase | — | (1,625) | |||||||||
| Payments in satisfaction of employees' minimum tax obligations | (8,253) | (15,680) | |||||||||
| Payment of dividends | (13,419) | — | |||||||||
| Other financing activities | (1,967) | (2,010) | |||||||||
| Net cash provided by financing activities | 709,189 | 1,211,897 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 27,042 | (1,528) | |||||||||
| Net increase in cash and cash equivalents | 1,042,264 | 183,235 | |||||||||
| Cash and Cash Equivalents at Beginning of Period | 493,046 | 204,872 | |||||||||
| Cash and Cash Equivalents at End of Period | $ | 1,535,310 | $ | 388,107 | |||||||
| Cash paid for interest | $ | 17,963 | $ | 46,430 | |||||||
| Cash paid for income taxes | $ | 53,696 | $ | 34,144 | |||||||
| Additions to property, plant & equipment included in accounts payable | $ | 21,650 | $ | 16,254 | |||||||
- See notes to condensed consolidated financial statements.
7
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
($000, including share amounts)
| Common Stock | Preferred Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total | Mezzanine Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Preferred Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - June 30, 2020 | 105,916 | $ | 1,486,947 | — | $ | — | $ | (87,383) | $ | 876,552 | (13,356) | $ | (199,313) | $ | 2,076,803 | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | 575 | 16,764 | — | — | — | — | (120) | (5,498) | 11,266 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in underwritten public offering | 10,698 | 438,589 | 2,300 | 445,319 | — | — | — | — | 883,908 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | — | 46,266 | — | — | 46,266 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 35,524 | — | — | — | 35,524 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $(152) | — | — | — | — | (555) | — | — | — | (555) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | (6,535) | — | — | (6,535) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - September 30, 2020 | 117,189 | 1,942,300 | 2,300 | 445,319 | (52,414) | 916,283 | (13,476) | (204,811) | 3,046,677 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | 854 | 43,533 | — | — | — | — | (11) | (1,318) | 42,215 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | — | 87,900 | — | — | 87,900 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 64,067 | — | — | — | 64,067 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $782 | — | — | — | — | 2,854 | — | — | — | 2,854 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | (6,900) | — | — | (6,900) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - December 31, 2020 | 118,043 | 1,985,833 | 2,300 | 445,319 | 14,507 | 997,283 | (13,487) | (206,129) | 3,236,813 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | 327 | 25,377 | — | — | — | — | (3) | (1,115) | 24,262 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series B shares issued in March 2021 | — | — | — | — | — | — | — | — | 75 | 716,087 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accretion to redemption value of Series B shares issued in March 2021 | — | — | — | — | — | (9) | — | — | (9) | — | 9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | — | 81,092 | — | — | 81,092 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (18,400) | — | — | — | (18,400) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $2,299 | — | — | — | — | 8,394 | — | — | — | 8,394 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | (7,004) | — | — | (7,004) | — | 104 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2021 | 118,370 | $ | 2,011,210 | 2,300 | $ | 445,319 | $ | 4,501 | $ | 1,071,362 | (13,490) | $ | (207,244) | $ | 3,325,148 | 75 | $ | 716,200 | ||||||||||||||||||||||||||||||||||||||||||||||||||
8
| Common Stock | Preferred Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total | Mezzanine Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Preferred Shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - June 30, 2019 | 76,315 | $ | 382,423 | — | $ | — | $ | (24,221) | $ | 943,581 | (12,604) | $ | (168,574) | $ | 1,133,209 | $ | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | 708 | 59,043 | — | — | — | — | (251) | (9,832) | 49,211 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchase | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued related to Finisar acquisition | 26,713 | 987,707 | — | — | — | — | — | — | 987,707 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (25,998) | — | — | (25,998) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (13,019) | — | — | — | (13,019) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in fair value of interest rate swap, net of taxes | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Pension adjustment, net of taxes of $23 | — | — | — | — | 84 | — | — | — | 84 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - September 30, 2019 | 103,736 | 1,429,173 | — | — | (37,156) | 917,583 | (12,855) | (178,406) | 2,131,194 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | 307 | 12,007 | — | — | — | — | (175) | (5,614) | 6,393 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchase | — | — | — | — | — | — | (50) | (1,625) | (1,625) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (98,213) | — | — | (98,213) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 24,590 | — | — | — | 24,590 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $989 | — | — | — | — | 3,609 | — | — | — | 3,609 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Pension adjustment, net of taxes of $(92) | — | — | — | — | (251) | — | — | — | (251) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - December 31, 2019 | 104,043 | 1,441,180 | — | — | (9,208) | 819,370 | (13,080) | (185,645) | 2,065,697 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based and deferred compensation activities | 235 | 18,174 | — | — | — | — | (23) | (649) | 17,525 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchase | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Earnings | — | — | — | — | — | 5,921 | — | — | 5,921 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (39,829) | — | — | — | (39,829) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of taxes of $(8,475) | — | — | — | — | (31,407) | — | — | — | (31,407) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension adjustment, net of taxes | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2020 | 104,278 | $ | 1,459,354 | — | $ | — | $ | (80,444) | $ | 825,291 | (13,103) | $ | (186,294) | $ | 2,017,907 | $ | — | |||||||||||||||||||||||||||||||||||||||||||||
9
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements of II-VI Incorporated (“II-VI”, the “Company”, “we”, “us” or “our”) for the three and nine months ended March 31, 2021 and 2020 are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation for the periods presented have been included. All adjustments are of a normal recurring nature unless disclosed otherwise. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K dated August 26, 2020. The condensed consolidated results of operations for the three and nine months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full fiscal year. The Condensed Consolidated Balance Sheet information as of June 30, 2020 was derived from the Company’s audited consolidated financial statements.
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the United States and world. The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of our business including the impact to our suppliers and customers as well as the impact to the countries and markets in which II-VI operates. At the onset of the COVID-19 outbreak, the Company began focusing intensely on mitigating the adverse impacts of COVID-19 on foreign and domestic operations starting by protecting its employees, suppliers and customers.
Note 2. Recently Issued Financial Accounting Standards
Financial Instruments - Credit Losses
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326), which modifies the measurement of expected credit losses on certain types of financial instruments, including trade receivables. The Company adopted this standard on July 1, 2020. The adoption did not have a material impact on the Company's condensed consolidated financial statements.
Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in Entity's Own Equity
In August 2020, the FASB issued ASC Update No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06"). The update simplifies the accounting for convertible instruments by eliminating two accounting models (i.e., the cash conversion model and beneficial conversion feature model) and reducing the number of embedded conversion features that could be recognized separately from the host contract. ASU 2020-06 also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. ASC 2020-06 is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. We are in the process of evaluating the effect of this adoption on our financial position and results of operations.
Note 3. Pending Coherent Acquisition
On March 25, 2021, II-VI and Coherent Inc., a Delaware corporation (“Coherent”), and Watson Merger Sub Inc., a Delaware corporation and 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 a 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 (other than (x) shares of Coherent Common Stock owned by II-VI, Coherent or any direct or indirect wholly owned subsidiary of II-VI or Coherent or (y) shares of Coherent Common Stock owned by stockholders who have properly exercised and perfected appraisal rights under Delaware law, in each
10
case immediately prior to the Effective Time), will be cancelled 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"), plus
(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")
From and after the Effective Time, all of the shares of Coherent Common Stock converted into the right to receive the Merger Consideration will no longer be outstanding and will automatically be cancelled and cease to exist, and uncertified shares of Coherent Common Stock represented by book-entry form ("Book-Entry Shares") and each certificate that, immediately prior to the Effective Time, represented any such shares of Coherent Common Stock (each, a "Certificate") will thereafter represent only the right to receive the Merger Consideration into which the shares of Coherent Common Stock represented by such Book-Entry Share or Certificate have been converted.
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 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 Director’s 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 cancelled 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 have unanimously approved the Merger and the Merger Agreement. The transaction is subject to customary closing conditions, including the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
regulatory approvals in other applicable jurisdictions, including China, South Korea and Germany, the effectiveness of a registration statement on Form S-4 registering the offering of shares of II-VI Common Stock to be issued in connection with the Merger, and approvals by the shareholders of II-VI and the stockholders of Coherent. The transaction is not subject to any financing condition.
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 $5.125 billion in debt financing (the debt financing under the Commitment Letter, the “Debt Financing”). The obligation of the Commitment Parties to provide the Debt Financing under the Commitment Letter is subject to a number of customary conditions.
In connection with entering into the Merger Agreement, II-VI entered into an investment agreement, dated as of March 25, 2021, (the "Investment Agreement") (as amended and restated as of March 30, 2021, the "Amended and Restated Investment Agreement"), with BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital, LP (the "Investor"). Pursuant to the terms of the Amended and Restated Investment Agreement, and subject to the conditions set forth therein:
(A) on March 31, 2021, the Company issued, sold and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock, 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 $750.0 million;
(B) the Company agreed to issue, sell and deliver to the Investor, immediately prior to Closing, 105,000 shares of a new Series B-2 Convertible Preferred Stock, 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 $1.050 billion; and
(C) the Company offered to the Investor an option to purchase up to an additional 35,000 shares of 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 up to $350.0 million.
The shares of New II-VI Convertible Preferred Stock accrue dividends at 5.00% per annum, subject to increase if II-VI defaults on payment obligations with respect to the New II-VI Convertible Preferred Stock, not to exceed 14% per annum. Until the fourth anniversary of the applicable issuance date of each series of New II-VI Convertible Preferred Stock, dividends are payable solely in-kind. After the fourth anniversary, dividends are payable on the applicable series, at the Company’s option, in cash, in-kind or as a combination of both.
Subject to the satisfaction or waiver of each of the closing conditions, II-VI and Coherent expect that the Merger will be completed prior to the end of calendar year 2021. 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.
The expenses associated with the pending acquisition for the three and nine months ended March 31, 2021 have not been allocated to an Operating Segment, and are presented in the Unallocated and Other within this quarterly report on Form 10-Q.
Note 4. Acquisitions and Investments
Acquisition of Ascatron AB
On August 20, 2020, the Company acquired all of the outstanding shares of Ascatron AB ("Ascatron"), located in Sweden. The acquisition will add essential elements to the Company's vertically integrated silicon carbide technology platform. Purchase price consideration totaled $36.7 million.
Due to the timing of the acquisition, the Company is in the process of measuring the fair value of assets acquired and liabilities assumed, including tangible and intangible assets and related deferred income taxes. The following table presents a
preliminary allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition ($000):
| Previously Reported September 30, 2020 | Measurement Period Adjustments (a) | As Adjusted (preliminary) | |||||||||||||||
| Assets | |||||||||||||||||
| Developed technology | $ | 20,000 | $ | (3,622) | $ | 16,378 | |||||||||||
| Goodwill | 18,922 | 3,018 | 21,940 | ||||||||||||||
| Other assets | 2,511 | 683 | 3,194 | ||||||||||||||
| Total assets acquired | $ | 41,433 | $ | 79 | $ | 41,512 | |||||||||||
| Liabilities | |||||||||||||||||
| Non-interest bearing liabilities | $ | (203) | $ | (1,101) | $ | (1,304) | |||||||||||
| Deferred tax liability | (4,526) | 1,022 | (3,504) | ||||||||||||||
| Total liabilities assumed | $ | (4,729) | $ | (79) | $ | (4,808) | |||||||||||
| Net assets acquired | $ | 36,704 | $ | — | $ | 36,704 | |||||||||||
(a) The Company recorded measurement period adjustments to its preliminary acquisition date fair values due to the refinement of its valuation models, assumptions and inputs. The measurement period adjustments were based upon information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the measurement of the amounts recognized at that date.
The goodwill is recorded in the Compound Semiconductors segment and is attributed to the workforce acquired as part of the transaction. The goodwill is non-deductible for income tax purposes. Transaction expenses related to the acquisition totaled $2.1 million for the nine months ended March 31, 2021 and are included in Selling, General and Administrative expenses in the Condensed Consolidated Statements of Earnings. Technology is being amortized with a remaining life of approximately 17 years.
The revenues and net loss from Ascatron included in the Company’s Condensed Consolidated Statement of Earnings for the three months ended March 31, 2021 were $0.3 million and $1.1 million, respectively.
The revenues and net loss from Ascatron included in the Company’s Condensed Consolidated Statement of Earnings for the nine months ended March 31, 2021 were $1.0 million and $2.2 million, respectively.
Purchase of Equity Investment in INNOViON Corporation
On October 1, 2020, II-VI acquired the remaining 6.1% interest in INNOViON Corporation ("Innovion") for $4.4 million. Innovion is a provider of ion implantation services supporting unique capabilities in semiconductor materials processing. This acquisition will add essential elements to the Company's vertically integrated silicon carbide technology platform.
Through the period ended September 30, 2020, the Company held a 93.9% investment in Innovion which was accounted for as an equity method investment. The Company accounted for the acquisition of the remaining equity of Innovion as a step acquisition, which required remeasurement of the Company's previous ownership interest to fair value prior to completing purchase accounting. Using step acquisition accounting, the Company increased the value of its previously held equity investment to its fair value of $66.6 million, which resulted in a gain of approximately $7.0 million, recorded in other expense (income), net in the Condensed Consolidated Statement of Operations in the second quarter of fiscal year 2021.
The Company utilized widely accepted income-based, market-based, and cost-based valuation approaches to perform the preliminary purchase price allocation and determine the fair value of the previously held equity method investment. Income-based valuation approaches included the use of the multi-period excess earnings and relief-from-royalty methods for certain acquired intangible assets.
Due to the timing of the acquisition, the Company is in the process of measuring the fair value of assets acquired and liabilities assumed, including tangible and intangible assets and related deferred income taxes. The following table presents a preliminary allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition ($000):
| Previously Reported December 31, 2020 | Measurement Period Adjustments (a) | As Adjusted (preliminary) | |||||||||||||||
| Assets | |||||||||||||||||
| Developed technology | $ | 15,000 | $ | (240) | $ | 14,760 | |||||||||||
| Customer lists | 10,000 | (1,003) | 8,997 | ||||||||||||||
| Goodwill | 29,478 | 1,901 | 31,379 | ||||||||||||||
| Property, plant, & equipment | 16,556 | (1,832) | 14,724 | ||||||||||||||
| Right of use asset | 10,644 | — | 10,644 | ||||||||||||||
| Other assets | 12,450 | 32 | 12,482 | ||||||||||||||
| Total assets acquired | $ | 94,128 | $ | (1,141) | $ | 92,987 | |||||||||||
| Liabilities | |||||||||||||||||
| Non-interest bearing liabilities | $ | (14,050) | $ | 506 | $ | (13,544) | |||||||||||
| Interest bearing liabilities | (3,430) | — | (3,430) | ||||||||||||||
| Deferred tax liabilities | (5,743) | 635 | (5,108) | ||||||||||||||
| Total liabilities assumed | $ | (23,223) | $ | 1,141 | $ | (22,082) | |||||||||||
| Net assets acquired | $ | 70,905 | $ | — | $ | 70,905 | |||||||||||
(a) The Company recorded measurement period adjustments to its preliminary acquisition date fair values due to the refinement of its valuation models, assumptions and inputs. The measurement period adjustments were based upon information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the measurement of the amounts recognized at that date.
The goodwill is recorded in the Compound Semiconductors segment and is attributed to the workforce acquired as part of the transaction. The goodwill is non-deductible for income tax purposes. Technology is being amortized with a remaining life of approximately 16 years. Customer lists are being amortized with a remaining life of approximately 14 years. Transaction expenses for the six months ended March 31, 2021 were insignificant.
The revenues from Innovion included in the Company’s Condensed Consolidated Statement of Earnings for the three months ended March 31, 2021 was $6.9 million. The net loss for the same period was insignificant.
The revenues and net loss from Innovion included in the Company’s Condensed Consolidated Statement of Earnings for the nine months ended March 31, 2021 were $14.1 million and $1.1 million, respectively.
Note 5. 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 and nine months ended March 31, 2021 and 2020 ($000):
| Three Months Ended March 31, 2021 | Nine Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Photonic Solutions | Compound Semiconductors | Unallocated & Other | Total | Photonic Solutions | Compound Semiconductors | Unallocated & Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Communications | $ | 476,234 | $ | 34,130 | $ | — | $ | 510,364 | $ | 1,403,960 | $ | 105,702 | $ | — | $ | 1,509,662 | |||||||||||||||||||||||||||||||
| Consumer | 2,402 | 65,544 | — | 67,946 | 5,924 | 237,011 | — | 242,935 | |||||||||||||||||||||||||||||||||||||||
| Industrial | 12,081 | 77,160 | — | 89,241 | 33,305 | 192,508 | — | 225,813 | |||||||||||||||||||||||||||||||||||||||
| Aerospace & Defense | — | 51,686 | — | 51,686 | — | 147,317 | — | 147,317 | |||||||||||||||||||||||||||||||||||||||
| Other | 17,264 | 46,731 | — | 63,995 | 45,398 | 126,760 | — | 172,158 | |||||||||||||||||||||||||||||||||||||||
| Total Revenues | $ | 507,981 | $ | 275,251 | $ | — | $ | 783,232 | $ | 1,488,587 | $ | 809,298 | $ | — | $ | 2,297,885 | |||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Photonic Solutions | Compound Semiconductors | Unallocated & Other | Total | Photonic Solutions | Compound Semiconductors | Unallocated & Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Communications | $ | 393,895 | $ | 32,083 | $ | — | $ | 425,978 | $ | 946,088 | $ | 82,594 | $ | 21,561 | $ | 1,050,243 | |||||||||||||||||||||||||||||||
| Consumer | 1,163 | 33,771 | — | 34,934 | 2,996 | 83,447 | 490 | 86,933 | |||||||||||||||||||||||||||||||||||||||
| Industrial | 12,545 | 59,397 | — | 71,942 | 39,400 | 185,227 | — | 224,627 | |||||||||||||||||||||||||||||||||||||||
| Aerospace & Defense | — | 44,409 | — | 44,409 | — | 128,261 | — | 128,261 | |||||||||||||||||||||||||||||||||||||||
| Other | 10,166 | 39,612 | — | 49,778 | 31,034 | 112,683 | — | 143,717 | |||||||||||||||||||||||||||||||||||||||
| Total Revenues | $ | 417,769 | $ | 209,272 | $ | — | $ | 627,041 | $ | 1,019,518 | $ | 592,212 | $ | 22,051 | $ | 1,633,781 | |||||||||||||||||||||||||||||||
"Other" revenue included in the tables above include revenue from the life science/medical, semiconductor and automotive end markets.
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 nine months ended March 31, 2021, the Company recognized revenue of $9.7 million related to customer payments that were included as contract liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2020. The Company had $37.1 million of contract liabilities recorded in the Condensed Consolidated Balance Sheet as of March 31, 2021.
Note 6. Inventories
The components of inventories were as follows ($000):
| March 31, 2021 | June 30, 2020 | ||||||||||
| Raw materials | $ | 207,598 | $ | 190,237 | |||||||
| Work in progress | 325,517 | 298,577 | |||||||||
| Finished goods | 140,629 | 130,996 | |||||||||
| $ | 673,744 | $ | 619,810 | ||||||||
Note 7. Property, Plant and Equipment
Property, plant and equipment consists of the following ($000):
| March 31, 2021 | June 30, 2020 | ||||||||||
| Land and improvements | $ | 20,236 | $ | 18,396 | |||||||
| Buildings and improvements | 413,377 | 345,736 | |||||||||
| Machinery and equipment | 1,441,536 | 1,352,835 | |||||||||
| Construction in progress | 125,918 | 111,394 | |||||||||
| Finance lease right-of-use asset | 25,000 | 25,000 | |||||||||
| 2,026,067 | 1,853,361 | ||||||||||
| Less accumulated depreciation | (793,921) | (638,589) | |||||||||
| $ | 1,232,146 | $ | 1,214,772 | ||||||||
Note 8. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill were as follows ($000):
| Nine Months Ended March 31, 2021 | |||||||||||||||||
| Photonic Solutions | Compound Semiconductors | Total | |||||||||||||||
| Balance-beginning of period | $ | 1,052,494 | $ | 186,515 | $ | 1,239,009 | |||||||||||
| Goodwill acquired | — | 53,319 | 53,319 | ||||||||||||||
| Finisar measurement period adjustments | (4,901) | — | (4,901) | ||||||||||||||
| Foreign currency translation | 4,436 | 1,649 | 6,085 | ||||||||||||||
| Balance-end of period | $ | 1,052,029 | $ | 241,483 | $ | 1,293,512 | |||||||||||
The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of March 31, 2021 and June 30, 2020 were as follows ($000):
| March 31, 2021 | June 30, 2020 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||||||||||
| Technology | $ | 476,691 | $ | (96,967) | $ | 379,724 | $ | 444,315 | $ | (68,048) | $ | 376,267 | |||||||||||||||||||||||
| Trade Names | 22,604 | (5,600) | 17,004 | 22,369 | (3,669) | 18,700 | |||||||||||||||||||||||||||||
| Customer Lists | 468,448 | (125,687) | 342,761 | 456,223 | (92,822) | 363,401 | |||||||||||||||||||||||||||||
| Other | 1,575 | (1,575) | — | 1,570 | (1,570) | — | |||||||||||||||||||||||||||||
| Total | $ | 969,318 | $ | (229,829) | $ | 739,489 | $ | 924,477 | $ | (166,109) | $ | 758,368 | |||||||||||||||||||||||
Note 9. Debt
The components of debt as of the dates indicated were as follows ($000):
| March 31, 2021 | June 30, 2020 | ||||||||||
Term A Facility, interest at LIBOR, as defined, plus 1.375% | $ | 1,072,925 | $ | 1,194,463 | |||||||
Revolving Credit Facility, interest at LIBOR, as defined, plus 1.375% | — | 74,000 | |||||||||
| Debt issuance costs, Term A Facility and Revolving Credit Facility | (26,924) | (32,174) | |||||||||
Term B Facility, interest at LIBOR, as defined, plus 3.50% | — | 714,600 | |||||||||
| Debt issuance costs, Term B Facility | — | (24,747) | |||||||||
0.50% convertible senior notes, assumed in the Finisar acquisition | 14,888 | 14,888 | |||||||||
0.25% convertible senior notes | 344,988 | 345,000 | |||||||||
0.25% convertible senior notes unamortized discount attributable to cash conversion option and debt issuance costs including initial purchaser discount | (20,425) | (30,688) | |||||||||
| Total debt | 1,385,452 | 2,255,342 | |||||||||
| Current portion of long-term debt | (62,050) | (69,250) | |||||||||
| Long-term debt, less current portion | $ | 1,323,402 | $ | 2,186,092 | |||||||
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.
16
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 -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 $25.0 million and a swing loan sub-facility initially not to exceed $20.0 million.
The Term B Facility was repaid in full by the Company subsequent to the public offerings that closed on July 7, 2020. In conjunction with the repayment, the Company paid $0.6 million in associated interest and expensed $24.7 million of debt issuance costs related to the Term B Facility.
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 “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.
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 16 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 March 31, 2021, the Company was in compliance with all financial covenants under the Credit Agreement.
0.50% Finisar Convertible Notes
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.
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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 $560.1 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 $561.1 million in cash, including accrued interest. No holders of Finisar Notes exercised the related conversion right. The Company borrowed $561.0 million under a delayed draw on its Term Loan A to fund the payment to the holders of Finisar Notes that exercised the repurchase right. As of March 31, 2021, approximately $14.9 million in aggregate principal amount of Finisar Notes remain outstanding.
0.25% Convertible Senior Notes
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.
As a result of the cash conversion option, the Company separately accounted for the value of the embedded conversion option as a debt discount. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using an expected present value technique (income approach) to estimate the fair value of similar nonconvertible debt; the debt discount is being amortized as additional non-cash interest expense over the term of the II-VI Notes using the effective interest method.
The equity component is not remeasured as long as it continues to meet the conditions for equity classification. 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 $501.2 million as of March 31, 2021 and $346.2 million as of June 30, 2020 (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,
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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.
Because the last reported sale price of II-VI Common Stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter ended March 31, 2021 was equal to or greater than 130% of the applicable conversion price on each applicable trading day, the II-VI Notes are convertible at the option of the holders thereof during the fiscal quarter ending June 30, 2021.
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 March 31, 2021; conversions were immaterial.
The following tables set forth total interest expense recognized related to the II-VI Notes for the three and nine months ended March 31, 2021 and March 31, 2020 ($000):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
0.25% contractual coupon | $ | 216 | $ | 218 | $ | 656 | $ | 659 | ||||||||||||||||||
| Amortization of debt discount and debt issuance costs including initial purchaser discount | 3,410 | 3,294 | 10,262 | 9,840 | ||||||||||||||||||||||
| Interest expense | $ | 3,625 | $ | 3,512 | $ | 10,918 | 10,499 | |||||||||||||||||||
The effective interest rate on the liability component for both periods presented was 4.5%. The unamortized discount amounted
to $17.9 million as of March 31, 2021 and is being amortized over the remaining life of the notes.
Aggregate Availability
The Company had aggregate availability of $448.6 million under its Revolving Credit Facility as of March 31, 2021.
Weighted Average Interest Rate
The weighted average interest rate of total borrowings was 1.5% and 3.7% for the nine months ended March 31, 2021 and 2020, respectively.
Note 10. Income Taxes
The Company’s year-to-date effective income tax rate at March 31, 2021 was 17.0% compared to an effective tax benefit of 13.0% 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, the impact of the U.S. enacted tax legislation partially offset by research and development incentives in certain jurisdiction, and foreign tax credits.
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 March 31, 2021 and June 30, 2020, the Company’s gross unrecognized income tax benefit, excluding interest and penalties, was $37.7 million and $42.8 million, respectively. The Company has classified the uncertain tax positions as noncurrent income tax liabilities, as the amounts are not expected to be paid within one year. If recognized, $31.1 million of the gross unrecognized tax benefits at March 31, 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 (Loss). The amount of accrued interest and penalties included in the gross unrecognized income tax benefit was $2.6 million and $3.8 million at March 31, 2021 and June 30, 2020, respectively. Fiscal years 2018 to 2021 remain open to examination by the U.S. Internal Revenue Service, fiscal years 2015 to 2021 remain open to examination by certain state jurisdictions, and fiscal years 2010 to 2021 remain open to examination by certain foreign taxing jurisdictions. The Company is currently under examination for certain subsidiary companies in the Philippines for the year 2017; Germany for the years 2012 through 2015; and India for the year 2016. The Company believes its income tax reserves for these tax matters are adequate.
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Note 11. 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.
The following table presents lease costs, which include short-term leases, lease term, and discount rates ($000):
| Three Months Ended March 31, 2021 | Nine Months Ended March 31, 2021 | ||||||||||
| Finance Lease Cost | |||||||||||
| Amortization of right-of-use assets | $ | 417 | $ | 1,250 | |||||||
| Interest on lease liabilities | 315 | 957 | |||||||||
| Total finance lease cost | $ | 732 | $ | 2,207 | |||||||
| Operating lease cost | 9,212 | 27,147 | |||||||||
| Sublease income | 368 | 1,103 | |||||||||
| Total lease cost | $ | 9,576 | $ | 28,251 | |||||||
| Cash Paid for Amounts Included in the Measurement of Lease Liabilities | |||||||||||
| Operating cash flows from finance leases | $ | 315 | $ | 957 | |||||||
| Operating cash flows from operating leases | 9,150 | 26,003 | |||||||||
| Financing cash flows from finance leases | 298 | 849 | |||||||||
| Weighted-Average Remaining Lease Term (in Years) | |||||||||||
| Finance leases | 10.8 | ||||||||||
| Operating leases | 7.4 | ||||||||||
| Weighted-Average Discount Rate | |||||||||||
| Finance leases | 5.6 % | ||||||||||
| Operating leases | 6.7 % | ||||||||||
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| Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2020 | ||||||||||
| Finance Lease Cost | |||||||||||
| Amortization of right-of-use assets | $ | 417 | $ | 1,250 | |||||||
| Interest on lease liabilities | 330 | 1,002 | |||||||||
| Total finance lease cost | 747 | 2,252 | |||||||||
| Operating lease cost | 9,050 | 23,702 | |||||||||
| Total lease cost | $ | 9,797 | $ | 25,954 | |||||||
| Cash Paid for Amounts Included in the Measurement of Lease Liabilities | |||||||||||
| Operating cash flows from finance leases | $ | 330 | $ | 1,002 | |||||||
| Operating cash flows from operating leases | 8,454 | 22,449 | |||||||||
| Financing cash flows from finance leases | 266 | 756 | |||||||||
Note 12. Equity and Redeemable Preferred Stock
Mandatory Convertible Preferred Stock
On July 2, 2020, II-VI announced the pricing of an underwritten public offering of 2,000,000 shares of 6.00% Series A Mandatory Convertible Preferred, no par value per share (“Mandatory Convertible Preferred Stock”), resulting in gross proceeds to II-VI from the offering of $400 million, before deducting the underwriting discounts and commissions and offering expenses payable by the Company (the "Preferred Stock Offering"). In addition, the underwriters had a 30-day option to purchase up to an additional 300,000 shares of Series A Mandatory Convertible Preferred Stock at the applicable public offering price, less underwriting discounts and commissions and solely to cover over-allotments with respect to the preferred stock offering. On July 2, 2020, the underwriters exercised the option in full, raising an additional approximately $60 million in gross proceeds. On July 7, 2020, the Company closed the Preferred Stock Offering, including the issuance and sale of 2.3 million shares of Mandatory Convertible Preferred Stock.
Upon conversion on the mandatory conversion date, as determined in accordance with the terms of the Mandatory Convertible Preferred Stock, each outstanding share of the Mandatory Convertible Preferred Stock, unless previously converted, will automatically convert into a number of shares of II-VI Common Stock equal to not more than 4.6512 shares of II-VI Common Stock and not less than 3.8760 shares of II-VI Common Stock (the “Minimum Conversion Rate”), depending on the applicable market value of the II-VI Common Stock, determined in accordance with the terms of the Mandatory Convertible Preferred Stock and 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 of Mandatory Convertible Preferred Stock, in whole or in part (but in no event less than one share of Mandatory Convertible Preferred Stock), at the 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 (but in no event less than one share of the Mandatory Convertible Preferred Stock), 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 $6.9 million of accrued preferred stock dividends during the third quarter of fiscal year 2021, which were presented as other accrued liabilities on the Condensed Consolidated Balance Sheet as of March 31, 2021.
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The following table presents dividends per share and dividends recognized for the three and nine months ended March 31, 2021:
| Three Months Ended March 31, 2021 | Nine Months Ended March 31, 2021 | ||||||||||
| Dividends per share | $ | 3.00 | $ | 8.80 | |||||||
| Series A Mandatory Convertible Preferred Stock dividends ($000) | $ | 6,900 | $ | 20,240 | |||||||
Redeemable Convertible Preferred Stock
The Company issued 75,000 shares of II-VI Series B-1 Convertible Preferred Stock in the quarter ended March 31, 2021. 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 any time after their issuance, at the election of the holder, each share of II-VI Series B-1 Convertible Preferred Stock may be converted into shares of II-VI Common Stock at a conversion price of $85.00 per share (“Conversion Price”), except that the shares of II-VI Series B-1 Convertible Preferred Stock will be so convertible only 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 any time following the third anniversary of March 31, 2021 ("Initial Issue Date"), at the election of II-VI, each share of II-VI Series B-1 Convertible Preferred Stock may be converted into shares of II-VI Common Stock 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 shares of II-VI Series B-1 Convertible Preferred Stock are initially nonvoting. Following the expiration of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the issued shares of II-VI Series B-1 Convertible Preferred Stock will 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 the tenth anniversary of the Initial Issue Date:
•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 (the “Fundamental Change Repurchase Offer”) 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 the fifth anniversary of the Initial Issue Date, the aggregate amount of all dividends that would have been paid (subject to certain exceptions), from the date of repurchase through the fifth anniversary of the Initial Issue Date.
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.
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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.
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 ten-year period (using the effective interest method) with such accretion accounted for as deemed dividends and reductions to Net Earnings Available to Common Stockholders.
The Company recognized $0.1 million of preferred stock dividends during the third quarter of fiscal year 2021, which were presented as a reduction to retained earnings on the Condensed Consolidated Balance Sheet as of March 31, 2021. During the quarter, the Company incurred $26.6 million of transaction costs associated with the II-VI Series B-1 Convertible Preferred Stock, of which, $22.5 million were capitalized, and $4.1 million were expensed in the Selling, General, and Administrative expenses in the Condensed Consolidated Statements of Earnings for the three and nine months ended March 31, 2021.
The following table presents dividends per share and dividends recognized for the three and nine months ended March 31, 2021:
| Three Months Ended March 31, 2021 | Nine Months Ended March 31, 2021 | ||||||||||
| Dividends per share | $ | 2 | $ | 2 | |||||||
| Dividends ($000) | 104 | 104 | |||||||||
| Deemed dividends ($000) | 9 | 9 | |||||||||
Common Stock Offering
On July 2, 2020, II-VI announced the pricing of an underwritten public offering of 9,302,235 shares of II-VI Common Stock at a public offering price of $43.00 per share, resulting in gross proceeds to II-VI from the offering of approximately $400 million, before deducting the underwriting discounts and commissions and offering expenses payable by II-VI (the “Common Stock Offering”). In addition, the underwriters had a 30-day option to purchase up to an additional 1,395,335 shares of II-VI Common Stock at the applicable public offering price, less underwriting discounts and commissions. On July 2, 2020, the underwriters exercised the option in full, raising an additional approximately $60 million in gross proceeds. On July 7, 2020, the Company closed the Common Stock Offering, including the issuance and sale of approximately 10.7 million shares II-VI Common Stock.
Note 13. Earnings Per Share
Basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per common share is computed by dividing the diluted earnings (loss) 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 and nine months ended March 31, 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 (loss) per common share. For the three and nine months ended March 31, 2021, diluted earnings (loss) 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.
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share computations for the periods presented ($000):
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| Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Net earnings (loss) | $ | 81,092 | $ | 5,921 | $ | 215,258 | $ | (118,290) | |||||||||||||||
| Deduct Series A preferred stock dividends | (6,900) | — | (20,240) | — | |||||||||||||||||||
| Deduct Series B redeemable preferred stock dividends | (104) | — | (104) | — | |||||||||||||||||||
| Deduct Series B redeemable preferred deemed dividend | (9) | — | (9) | — | |||||||||||||||||||
| Basic earnings (loss) available to common shareholders | $ | 74,079 | $ | 5,921 | $ | 194,905 | $ | (118,290) | |||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Add back interest on Convertible Senior Notes Due 2022 | $ | 3,066 | $ | — | $ | 9,199 | $ | — | |||||||||||||||
| Diluted earnings (loss) available to common shareholders | $ | 77,145 | $ | 5,921 | $ | 204,103 | $ | (118,290) | |||||||||||||||
| Denominator | |||||||||||||||||||||||
| Weighted average shares | 104,767 | 91,081 | 103,883 | 82,615 | |||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Common stock equivalents | 4,203 | 2,354 | 3,424 | — | |||||||||||||||||||
0.25% Convertible Senior Notes due 2022 | 7,331 | — | 7,331 | — | |||||||||||||||||||
| Diluted weighted average common shares | 116,302 | 93,435 | 114,637 | 82,615 | |||||||||||||||||||
| Basic earnings (loss) per common share | $ | 0.71 | $ | 0.07 | $ | 1.88 | $ | (1.43) | |||||||||||||||
| Diluted earnings (loss) per common share | $ | 0.66 | $ | 0.06 | $ | 1.78 | $ | (1.43) | |||||||||||||||
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 March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Series A Mandatory Convertible Preferred Stock | 8,915 | — | 8,915 | — | |||||||||||||||||||
0.25% Convertible Senior Notes due 2022 | — | 7,331 | — | 7,331 | |||||||||||||||||||
| Common stock equivalents | 14 | 410 | 154 | 2,801 | |||||||||||||||||||
0.50% Finisar Convertible Notes | — | 75 | — | 360 | |||||||||||||||||||
| Series B Redeemable Preferred Stock | 98 | — | 33 | — | |||||||||||||||||||
| Total anti-dilutive shares | 9,027 | 7,816 | 9,102 | 10,492 | |||||||||||||||||||
Note 14. 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
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segments. The Company evaluates business segment performance based upon segment operating income, which is defined as 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.
Both the acquisitions of Ascatron and Innovion are presented within the Compound Semiconductors segment since the dates of acquisition.
The accounting policies are consistent across each segment. To the extent possible, the Company’s corporate expenses and assets are allocated to the segments. Unallocated and Other includes eliminating inter-segment sales and transfers, the results of Finisar since the acquisition date through September 30, 2019, and transaction costs related to the Finisar transaction. The expenses associated with the pending acquisition of Coherent for the three and nine months ended March 31, 2021 have not been allocated to an Operating Segment, and are presented in the Unallocated and Other.
The following tables summarize selected financial information of the Company’s operations by segment ($000):
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||
| Photonic Solutions | Compound Semiconductors | Unallocated & Other | Total | ||||||||||||||||||||
| Revenues | $ | 507,981 | $ | 275,251 | $ | — | $ | 783,232 | |||||||||||||||
| Inter-segment revenues | 12,209 | 61,272 | (73,481) | — | |||||||||||||||||||
| Operating income | 48,286 | 52,522 | (15,728) | 85,080 | |||||||||||||||||||
| Interest expense | — | — | — | (13,034) | |||||||||||||||||||
| Other income, net | — | — | — | 21,432 | |||||||||||||||||||
| Income taxes | — | — | — | (12,387) | |||||||||||||||||||
| Net earnings | — | — | — | 81,092 | |||||||||||||||||||
| Depreciation and amortization | 41,060 | 26,925 | — | 67,985 | |||||||||||||||||||
| Expenditures for property, plant & equipment | 16,364 | 9,639 | — | 26,002 | |||||||||||||||||||
| Segment assets | 4,182,088 | 2,179,632 | — | 6,361,720 | |||||||||||||||||||
| Goodwill | 1,052,029 | 241,483 | — | 1,293,512 | |||||||||||||||||||
| Three Months Ended March 31, 2020 | |||||||||||||||||||||||
| Photonic Solutions | Compound Semiconductors | Unallocated & Other | Total | ||||||||||||||||||||
| Revenues | $ | 417,769 | $ | 209,272 | $ | — | $ | 627,041 | |||||||||||||||
| Inter-segment revenues | 6,899 | 36,492 | (43,391) | — | |||||||||||||||||||
| Operating income (loss) | 48,706 | 24,894 | (4,563) | 69,036 | |||||||||||||||||||
| Interest expense | — | — | — | (28,530) | |||||||||||||||||||
| Other expense, net | — | — | — | (7,168) | |||||||||||||||||||
| Income taxes | — | — | — | (27,417) | |||||||||||||||||||
| Net earnings | — | — | — | 5,921 | |||||||||||||||||||
| Depreciation and amortization | 14,272 | 23,752 | — | 38,024 | |||||||||||||||||||
| Expenditures for property, plant & equipment | 8,083 | 19,604 | — | 27,687 | |||||||||||||||||||
| Nine Months Ended March 31, 2021 | |||||||||||||||||||||||
| Photonic Solutions | Compound Semiconductors | Unallocated & Other | Total | ||||||||||||||||||||
| Revenues | $ | 1,488,587 | $ | 809,298 | $ | — | $ | 2,297,885 | |||||||||||||||
| Inter-segment revenues | 27,866 | 193,171 | (221,037) | — | |||||||||||||||||||
| Operating income (loss) | 147,159 | 173,494 | (15,728) | 304,925 | |||||||||||||||||||
| Interest expense | — | — | — | (45,833) | |||||||||||||||||||
| Other expense, net | — | — | — | 246 | |||||||||||||||||||
| Income taxes | — | — | — | (44,081) | |||||||||||||||||||
| Net earnings | — | — | — | 215,258 | |||||||||||||||||||
| Depreciation and amortization | 119,510 | 80,360 | — | 199,870 | |||||||||||||||||||
| Expenditures for property, plant & equipment | 62,450 | 42,881 | — | 105,331 | |||||||||||||||||||
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| Nine Months Ended March 31, 2020 | |||||||||||||||||||||||
| Photonic Solutions | Compound Semiconductors | Unallocated & Other | Total | ||||||||||||||||||||
| Revenues | $ | 1,019,518 | $ | 592,212 | $ | 22,051 | $ | 1,633,781 | |||||||||||||||
| Inter-segment revenues | 21,245 | 116,548 | (137,793) | — | |||||||||||||||||||
| Operating income (loss) | 793 | 42,580 | (71,389) | (28,017) | |||||||||||||||||||
| Interest expense | — | — | — | (63,888) | |||||||||||||||||||
| Other expense, net | — | — | — | (12,734) | |||||||||||||||||||
| Income taxes | — | — | — | (13,651) | |||||||||||||||||||
| Net loss | — | — | — | (118,290) | |||||||||||||||||||
| Depreciation and amortization | 76,262 | 67,119 | 3,743 | 147,124 | |||||||||||||||||||
| Expenditures for property, plant & equipment | 38,785 | 66,426 | 2,764 | 107,975 | |||||||||||||||||||
Note 15. Share-Based Compensation
The Company’s Board of Directors adopted the II-VI Incorporated 2018 Omnibus Incentive Plan (the “Plan”), which was approved by the Company’s shareholders. The Plan provides for the grant of performance-based cash incentive awards, non-qualified stock options, stock appreciation rights, restricted share awards, restricted share units, deferred share awards, performance share awards and performance share units to employees, officers and directors of the Company. The maximum number of shares of II-VI Common Stock authorized for issuance under the Plan is limited to 3,550,000 shares of II-VI Common Stock, not including any remaining shares forfeited under the predecessor plans that may be rolled into the Plan. The Company records share-based compensation expense for these awards in accordance with U.S. GAAP, which requires the recognition of grant-date fair value of share-based compensation in net earnings (loss) and over the requisite service period of the individual grantees, which generally equals the vesting period. The Company accounts for cash-based stock appreciation rights, cash-based restricted share unit awards and cash-based performance share unit awards as liability awards, in accordance with applicable accounting standards.
Share-based compensation expense for the periods indicated was as follows ($000):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Stock options and cash-based stock appreciation rights | $ | 1,328 | $ | 2,154 | $ | 8,662 | $ | 6,813 | ||||||||||||||||||
| Restricted share awards and cash-based restricted share unit awards | 12,089 | 10,327 | 37,972 | 35,929 | ||||||||||||||||||||||
| Performance share awards and cash-based performance share unit awards | 3,320 | 1,899 | 13,684 | 7,058 | ||||||||||||||||||||||
| $ | 16,737 | $ | 14,380 | $ | 60,318 | $ | 49,800 | |||||||||||||||||||
Note 16. 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.
26
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 $33.4 million is recognized in the Condensed Consolidated Balance Sheet within other liabilities as of March 31, 2021. Changes in fair value are recorded within accumulated other comprehensive income (loss) on the Condensed Consolidated Balance Sheet and reclassified into the Condensed Consolidated Statement of Earnings (Loss) 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 March 31, 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 9. Debt for details on the Company’s debt facilities.
The fair value and carrying value of the II-VI Notes and Finisar Notes were as follows at March 31, 2021 ($000):
| Fair Value | Carrying Value | ||||||||||
| II-VI Notes | $ | 519,918 | $ | 324,563 | |||||||
| Finisar Notes | 14,739 | 14,888 | |||||||||
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.
By entering into the Investment Agreement as described in Note 3 on March 25, 2021, the Company entered into a commitment to issue the shares of II-VI Series B-1 Convertible Preferred Stock on the Initial Closing Date for a fixed price (such commitment the “Forward Sale Commitment”). The Forward Sale Commitment comprises a financial instrument, other than an outstanding share, that, at inception, has both of the following characteristics: (i) embodies an obligation to repurchase the Company's equity shares and (ii) requires or may require the Company to settle the obligation by transferring assets. Under ASC 480, Distinguishing Liabilities from Equity, it is required to be initially measured and subsequently remeasured, at fair value as an asset or liability with changes in fair value recognized in earnings. An option pricing model was utilized to calculate the fair value of the Forward Sale Commitment. The Company recognized $11.4 million of realized gains within Other Expense (Income), Net in the Condensed Consolidated Statements of Earnings for the three and nine months ended March 31, 2021, related to the Forward Sale Commitment due to changes in its fair value from March 25, 2021 to its settlement on March 31, 2021.
Note 17. Share Repurchase Programs
In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million II-VI 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
27
purchased by the Company are retained as treasury stock and available for general corporate purposes. The Company did not repurchase any shares pursuant to this Program during the quarter ended March 31, 2021. Through March 31, 2021, the Company has cumulatively purchased 1,416,587 shares of II-VI Common Stock pursuant to the Program for approximately $22.3 million.
Note 18. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) (“AOCI”) by component, net of tax, for the nine months ended March 31, 2021 were as follows ($000):
| Foreign Currency Translation Adjustment | Interest Rate Swap | Defined Benefit Pension Plan | Total Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||
AOCI - June 30, 2020 | $ | (31,596) | $ | (44,085) | $ | (11,702) | $ | (87,383) | |||||||||||||||
| Other comprehensive income before reclassifications | 81,191 | (418) | — | 80,773 | |||||||||||||||||||
| Amounts reclassified from AOCI | — | 11,111 | — | 11,111 | |||||||||||||||||||
| Net current-period other comprehensive income | 81,191 | 10,693 | — | 91,884 | |||||||||||||||||||
| AOCI - March 31, 2021 | $ | 49,595 | $ | (33,392) | $ | (11,702) | $ | 4,501 | |||||||||||||||
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 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, 2020 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 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.
On July 7, 2020, the Company closed its underwritten public offering and sale of 2.3 million shares of Series A Mandatory Convertible Preferred Stock, as well as its underwritten public offering and sale of approximately 10.7 million shares of its common stock. See Note 12. Equity and Redeemable Preferred Stock, to our Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for further details.
On March 31, 2021 the Company issued, sold and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock of the Company for an aggregate purchase price of $750,000,000. An additional 105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company are to be sold and delivered immediately prior to the closing of the business combination with Coherent, Inc. See Note 12. Equity and Redeemable Preferred Stock, to our Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for further details.
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. Within this quarterly report on Form 10-Q for the three and nine months ended March 31, 2021, the results of Innovion and Ascatron have been allocated to the Compound Semiconductors Segment.
Pending Coherent Acquisition
On March 25, 2021, II-VI and Coherent Inc., a Delaware corporation (“Coherent”), and Watson Merger Sub Inc., a Delaware corporation and 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 a 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 (other than (x) shares of Coherent Common Stock owned by II-VI, Coherent or any direct or indirect wholly owned subsidiary of II-VI or Coherent or (y) shares of Coherent Common Stock owned by stockholders who have properly exercised and perfected appraisal rights under Delaware law, in each case immediately prior to the Effective Time), will be cancelled 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"), plus
(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")
From and after the Effective Time, all of the shares of Coherent Common Stock converted into the right to receive the Merger Consideration will no longer be outstanding and will automatically be cancelled and cease to exist, and uncertified shares of Coherent Common Stock represented by book-entry form ("Book-Entry Shares") and each certificate that, immediately prior to the Effective Time, represented any such shares of Coherent Common Stock (each, a "Certificate") will thereafter represent only the right to receive the Merger Consideration into which the shares of Coherent Common Stock represented by such Book-Entry Share or Certificate have been converted.
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 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 Director’s 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 cancelled 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 have unanimously approved the Merger and the Merger Agreement. The transaction is subject to customary closing conditions, including the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, regulatory approvals in other applicable jurisdictions, including China, South Korea and Germany, the effectiveness of a registration statement on Form S-4 registering the offering of shares of II-VI Common Stock to be issued in connection with the Merger, and approvals by the shareholders of II-VI and the stockholders of Coherent. The transaction is not subject to any financing condition.
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 $5.125 billion in debt financing (the debt financing under the Commitment Letter, the “Debt Financing”). The obligation of the Commitment Parties to provide the Debt Financing under the Commitment Letter is subject to a number of customary conditions.
In connection with entering into the Merger Agreement, II-VI entered into an investment agreement, dated as of March 25, 2021 (the "Investment Agreement") (as amended and restated as of March 30, 2021, the "Amended and Restated Investment
Agreement"), with BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital, LP (the "Investor"). Pursuant to the terms of the Amended and Restated Investment Agreement, and subject to the conditions set forth therein:
(A) on March 31, 2021, the Company issued, sold and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock, 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 $750.0 million;
(B) the Company agreed to issue, sell and deliver to the Investor, immediately prior to Closing, 105,000 shares of a new Series B-2 Convertible Preferred Stock, 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 $1.050 billion; and
(C) the Company offered to the Investor an option to purchase up to an additional 35,000 shares of 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 up to $350.0 million
The shares of New II-VI Convertible Preferred Stock accrue dividends at 5.00% per annum, subject to increase if II-VI defaults on payment obligations with respect to the New II-VI Convertible Preferred Stock, not to exceed 14% per annum. Until the fourth anniversary of the applicable issuance date of each series of New II-VI Convertible Preferred Stock, dividends are payable solely in-kind. After the fourth anniversary, dividends are payable on the applicable series, at the Company’s option, in cash, in-kind or as a combination of both.
Subject to the satisfaction or waiver of each of the closing conditions, II-VI and Coherent expect that the Merger will be completed prior to the end of calendar year 2021. 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.
The expenses associated with the pending acquisition for the three and nine months ended March 31, 2021 have not been allocated to an Operating Segment, and are presented in the Unallocated and Other within this quarterly report on Form 10-Q.
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 26, 2020 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 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 is having a significant impact on global markets due to resulting supply chain and production disruptions, workforce and travel restrictions, quarantines and lockdown orders, reduced spending and other similar measures implemented by many companies and other factors. Following the initial outbreak of COVID-19, we experienced temporary disruptions to our operations in China. While these operations have returned to active service, most of our administrative facilities continue working remotely.
Our focus continues to be the protection of the health and safety of our employees and business partners. In our facilities, we have deployed new safety measures, including use of protective equipment, social distancing, mandatory COVID-19 testing, contact tracing, cleaning protocols for high touch areas, foot traffic flow, air filtering and flow, guidance to employees on matters such as effective hygiene and disinfection, limited and remote access working where feasible, and strict restrictions on non-essential employees from entering our facilities. 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.
The full extent of the impact of the COVID-19 pandemic and the related responses on our operational and financial performance continues to be uncertain and will depend on many factors outside our control, including, without limitation, the duration and severity of the pandemic, the efficacy of vaccines relative to existing and emerging virus strains, the broad availability of the vaccines, 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, 2020. 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 included in the Annual Report on Form 10-K for the year ended June 30, 2020 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 (Loss) for the three and nine months ended March 31, 2021 and 2020 ($ in millions):
| Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | ||||||||||||||||||||||
| % of Revenues | % of Revenues | ||||||||||||||||||||||
| Total revenues | $ | 783.2 | 100.0 | % | $ | 627.0 | 100.0 | % | |||||||||||||||
| Cost of goods sold | 483.7 | 61.8 | 381.1 | 60.8 | |||||||||||||||||||
| Gross margin | 299.6 | 38.2 | 245.9 | 39.2 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Internal research and development | 83.2 | 10.6 | 94.8 | 15.1 | |||||||||||||||||||
| Selling, general and administrative | 131.2 | 16.8 | 82.1 | 13.1 | |||||||||||||||||||
| Interest and other, net | (8.4) | (1.1) | 35.7 | 5.7 | |||||||||||||||||||
| Earnings before income taxes | 93.5 | 11.9 | 33.3 | 5.3 | |||||||||||||||||||
| Income taxes | 12.4 | 1.6 | 27.4 | 4.4 | |||||||||||||||||||
| Net earnings | $ | 81.1 | 10.4 | % | $ | 5.9 | 0.9 | % | |||||||||||||||
| Diluted earnings per share | $ | 0.66 | $ | 0.06 | |||||||||||||||||||
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| Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 | ||||||||||||||||||||||
| % of Revenues | % of Revenues | ||||||||||||||||||||||
| Total revenues | $ | 2,297.9 | 100.0 | % | $ | 1,633.8 | 100.0 | % | |||||||||||||||
| Cost of goods sold | 1,389.3 | 60.5 | 1,116.4 | 68.3 | |||||||||||||||||||
| Gross margin | 908.6 | 39.5 | 517.4 | 31.7 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Internal research and development | 246.3 | 10.7 | 238.6 | 14.6 | |||||||||||||||||||
| Selling, general and administrative | 357.3 | 15.5 | 306.8 | 18.8 | |||||||||||||||||||
| Interest and other, net | 45.6 | 2.0 | 76.6 | 4.7 | |||||||||||||||||||
| Earnings (loss) before income taxes | 259.4 | 11.3 | (104.6) | (6.4) | |||||||||||||||||||
| Income taxes | 44.1 | 1.9 | 13.7 | 0.8 | |||||||||||||||||||
| Net earnings (loss) | $ | 215.3 | 9.4 | % | $ | (118.3) | (7.2) | % | |||||||||||||||
| Diluted earnings (loss) per share | $ | 1.78 | $ | (1.43) | |||||||||||||||||||
Consolidated
Revenues. Revenues for the three months ended March 31, 2021 increased 25% to $783.2 million, compared to $627.0 million for the same period last fiscal year. Revenues for the nine months ended March 31, 2021 increased 41% to $2,297.9 million, compared to $1,633.8 million for the same period last fiscal year. During the three and nine months ended March 31, 2021, Finisar Corporation ("Finisar") operations contributed $360.7 million and $1,059.7 million, respectively, in revenues, as compared to $281.6 million and $610.4 million in the same periods of the prior fiscal year. In addition to revenue contributed by Finisar, the Company realized increased revenues within its product lines for consumer electronics and communications.
Gross margin. Gross margin for the three months ended March 31, 2021 was $299.6 million, or 38.2% of total revenues, compared to $245.9 million, or 39.2% of total revenues, for the same period last fiscal year. Gross margin for the nine months ended March 31, 2021 was $908.6 million, or 39.5% of total revenues, compared to $517.4 million, or 31.7% of total revenues, for the same period last fiscal year. The decline in gross margin of 100 basis points for the three months ended March 31, 2021 was driven by a shift in product mix in the Company’s Photonic Solutions segment towards lower margin products. The improvement in the gross margin by 780 basis points for the nine months ended March 31, 2021 compared to the same period last year was driven by $87.7 million of additional cost of goods sold related to the fair value adjustment of the acquired Finisar inventory recorded in the nine months ended March 31, 2020, in addition to favorable product mix in the Compound Semiconductors segment driven by higher margins on the Company's products for consumer electronics.
Internal research and development. Internal research and development (“IR&D”) expenses for the three months ended March 31, 2021 were $83.2 million, or 10.6% of revenues, compared to $94.8 million, or 15.1% of revenues, for the same period last fiscal year. IR&D expenses for the nine months ended March 31, 2021 were $246.3 million, or 10.7% of revenue, compared to $238.6 million, or 14.6% of revenues, for the same period last fiscal year. The decrease in IR&D as a percentage of revenue over prior year was the result of qualification of the Company's Sherman, Texas wafer fabrication facility.
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2021 were $131.2 million, or 16.8% of revenues, compared to $82.1 million, or 13.1% of revenues, for the same period last fiscal year. SG&A expenses for the nine months ended March 31, 2021 were $357.3 million, or 15.5% of revenues, as compared to $306.8 million, or 18.8% of revenues, for the same period last fiscal year. The increase in SG&A as a percentage of revenue for the three month period compared to the same period last fiscal year was primarily the result of transaction costs incurred in the current year related to the Coherent acquisition. During the three months ended March 31, 2021 restructuring costs and restructuring related and transaction expenses of approximately $16.7 million as compared to $5.9 million during the same period last fiscal year. The decrease in SG&A as a percentage of revenue for the nine month period compared to the same period last fiscal year was primarily the result of restructuring related and transaction costs incurred in the prior year related to the Finisar acquisition. During the nine months ended March 31, 2021 transaction expenses totaled $20.1 million as compared to $66.7 million during the same period last fiscal year.
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Interest and other, net. Interest and other, net for the three months ended March 31, 2021 was income of $8.4 million, compared to expense of $35.7 million for the same period last fiscal year. Interest and other, net for the nine months ended March 31, 2021 was expense of $45.6 million, compared to expense of $76.6 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 March 31, 2021, interest and other, net decreased by $44.1 million in comparison to the same period last fiscal year, driven by the gain recognized on the mark to market adjustment on the forward sale agreement associated with the Bain equity, in addition to lower levels of debt outstanding subsequent to the payment of the Term B facility in the first quarter of 2021. For the nine months ended March 31, 2021 interest and other, net decreased by $31.0 million compared to the same period last fiscal year, driven by lower levels of debt outstanding and gains of $7.0 million and $11.4 million recognized in relation to the Innovion acquisition and the forward sale agreement, respectively. These gains were offset by $24.7 million of debt issuance costs recognized in conjunction with the repayment of the Company's Term B Facility.
There were foreign currency losses of $4.3 million for the current nine-month period due to the volatility in the foreign exchange market, compared to $8.1 million of losses for the nine months ended March 31, 2020.
Income taxes. The Company’s year-to-date effective income tax rate at March 31, 2021 was 17.0%, compared to an effective tax benefit of 13% for the same period last fiscal year. The variations between the Company’s effective tax rate and the U.S. statutory rate of 21% were primarily due to tax rate differentials between U.S. and foreign jurisdictions, the impact of the U.S. enacted tax legislation partially offset by research and development incentives in certain jurisdictions, and foreign tax credits.
Segment Reporting
Revenues and operating income for the Company’s reportable segments are discussed below. Operating income differs from net earnings (loss) in that operating income excludes certain operational expenses included in other expense (income) – net as reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance over which management has direct control and is used by management in its evaluation of segment performance. See Note 14. Segment Reporting, to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the Company’s reportable segments and for the reconciliation of the Company’s operating income to net earnings (loss), which is incorporated herein by reference.
Photonic Solutions ($ in millions)
| Three Months Ended March 31, | % Increase | Nine Months Ended March 31, | % Increase | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Revenues | $ | 508.0 | $ | 417.8 | 22% | $ | 1,488.6 | $ | 1,019.5 | 46% | |||||||||||||||||||||||||
| Operating income | $ | 48.3 | $ | 48.7 | (1)% | $ | 147.2 | $ | 0.8 | 18,457% | |||||||||||||||||||||||||
Revenues for the three months ended March 31, 2021 increased 22% to $508.0 million, compared to $417.8 million for the same period last fiscal year. Revenues for the nine months ended March 31, 2021 increased 46% to $1,488.6 million, compared to $1,019.5 million for the same period last fiscal year. The increase in revenue during the three months ended March 31, 2021, was primarily due to sustained demand for products in communications. The increase in revenues during the nine months ended March 31, 2021 was primarily due to the acquisition of Finisar, which contributed $376.4 million in incremental revenue for the nine months ended March 31, 2021, as compared to prior year, in addition to the sustained demand for products in communications.
Operating income for the three months ended March 31, 2021 decreased 1% to $48.3 million, compared to operating income of $48.7 million for the same period last fiscal year. The decrease in operating income was driven by a shift in product mix towards lower margin products. Operating income for the nine months ended March 31, 2021 increased to $147.2 million, compared to an operating income of $0.8 million for the same period last fiscal year. The increase in operating income during the current nine-month period compared to the same period last fiscal year was primarily driven by the incremental margin realized from the increased revenues during the current year, product mix towards higher margin profiles, and the realization of synergies and plant efficiency associated with the Finisar acquisition. Additionally, the nine months ended March 31, 2021 included expenses of $80.7 million related to the fair market value step-up of inventory.
Compound Semiconductors ($ in millions)
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| Three Months Ended March 31, | % Increase | Nine Months Ended March 31, | % Increase | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Revenues | $ | 275.3 | $ | 209.3 | 32% | $ | 809.3 | $ | 592.2 | 37% | |||||||||||||||||||||||||
| Operating income | $ | 52.5 | $ | 24.9 | 111% | $ | 173.5 | $ | 42.6 | 307% | |||||||||||||||||||||||||
Revenues for the three months ended March 31, 2021 for Compound Semiconductors increased 32% to $275.3 million, compared to revenues of $209.3 million for the same period last fiscal year. Revenues for the nine months ended March 31, 2021 for Compound Semiconductors increased 37% to $809.3 million, compared to $592.2 million for the same period last fiscal year. The increase in revenues during the three and nine months ended March 31, 2021 primarily related to the sharp increase in product shipments addressing the consumer electronics market.
Operating income for the three months ended March, 31 2021 increased 111% to $52.5 million, compared to an operating income of $24.9 million for the same period last fiscal year. Operating income for the nine months ended March 31, 2021 increased 307% to $173.5 million, compared to $42.6 million for the same period last fiscal year. The increase in operating income during the three and nine months ended March 31, 2021, compared to the same period last fiscal year was primarily driven by a sharp increase in product shipments addressing the consumer market. In addition, the prior year three and nine months ended, included unabsorbed operating costs incurred at the segment's Sherman, Texas wafer fabrication facility during its qualification phase.
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 obligations. Supplemental information pertaining to our sources and uses of cash for the periods indicated is presented as follows:
Sources (uses) of Cash (millions):
| Nine Months Ended Mar 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net cash provided by operating activities | $ | 446.9 | $ | 120.5 | |||||||
| Net proceeds from equity issuance | 1,611.4 | — | |||||||||
| Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan | 31.6 | 5.1 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents and other items | 27.0 | (1.5) | |||||||||
| Proceeds on long-term borrowings | — | 2,131.0 | |||||||||
| Payments on Finisar Notes | — | (560.1) | |||||||||
| Debt issuance costs | — | (63.5) | |||||||||
| Common stock repurchases | — | (1.6) | |||||||||
| Payments under prior term loan and credit facility | — | (176.6) | |||||||||
| Payments under new long-term borrowings and credit facility | (910.1) | (104.6) | |||||||||
| Additions to property, plant & equipment | (105.3) | (108.0) | |||||||||
| Purchases of businesses, net of cash acquired | (34.4) | (1,036.6) | |||||||||
| Payment of dividends | (13.4) | — | |||||||||
| Payments in satisfaction of employees' minimum tax obligations | (8.3) | (15.7) | |||||||||
| Other items | (3.0) | (5.2) | |||||||||
Net cash provided by operating activities:
Net cash provided by operating activities was $446.9 million during the current nine-month period compared to $120.5 million of cash used by operating activities during the same period last fiscal year. The increase in cash flows provided by operating activities during the nine months ended March 31, 2021 compared to the same period last fiscal year was primarily driven by additional net earnings of $333.5 million in the nine months ended March 31, 2021 compared to the same period last fiscal year.
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Lower earnings in the prior year resulted from acquisition-related expenses incurred for the acquisition of Finisar. Acquisition-related expenses include transaction expenses, and expensing of the fair value write-up of acquired inventory.
Net cash used in investing activities:
Net cash used in investing activities was $140.8 million for the nine months ended March 31, 2021, compared to net cash used of $1,147.6 million for the same period last fiscal year. Net cash used in investing activities during the current period primarily included $34.4 million for net cash paid for the acquisitions of Ascatron AB and INNOViON Corporation and $105.3 million of capital expenditures to continue to increase capacity to meet the growing demand for the Company’s product portfolio. Net cash used in investing activities from the nine-month period ended March 31, 2020 was primarily used to fund the Finisar acquisition.
Net cash provided by financing activities:
Net cash provided by financing activities was $709.2 million for the nine months ended March 31, 2021, compared to net cash provided by financing activities of $1,211.9 million for the same period last fiscal year. Net cash provided by financing activities was primarily impacted by $1,611.4 million of net proceeds from the Company's underwritten public offering in July 2020 as well as the issuance of the Series B Preferred Stock in March 2021, offset by cash used to repay borrowings of $910.1 million.
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”).
The Credit Agreement also provides for a letter of credit sub-facility not to exceed $25.0 million and a swing loan sub-facility initially not to exceed $20.0 million.
The Term B Facility was repaid in full by the Company subsequent to the public offerings that closed on July 7, 2020. Additional information regarding the underwritten public offering is set forth in Note 12.
Additional information regarding the Senior Credit Facilities and certain of the Company's other indebtedness is set forth in Note 9. 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, Euro, and the Malaysian Ringgit. No significant changes have occurred in the techniques and instruments used.
Interest Rate Risks
As of March 31, 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
36
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 $2.9 million and $9.3 million for the three and nine months ended March 31, 2021.
Item 4. CONTROLS AND PROCEDURES
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, 2020, 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.
Risks Relating to the Merger
Although II-VI expects that its acquisition of Coherent will result in cost savings, synergies and other benefits, the combined company may not realize those benefits because of integration difficulties and other challenges.
The success of II-VI’s acquisition of Coherent will depend in large part on the success of the management of the combined company in integrating the operations, strategies, technologies and personnel of the two companies following the completion of the Merger. The combined company may fail to realize some or all of the anticipated benefits of the Merger if the integration process takes longer than expected or is more costly than expected. The failure of the combined company to meet the challenges involved in successfully integrating the operations of the two companies or to otherwise realize any of the anticipated benefits of the Merger, including additional cost savings and synergies, could impair the operations of the combined company. In addition, II-VI anticipates that the overall integration of Coherent will be a time-consuming and expensive process that, without proper planning and effective and timely implementation, could significantly disrupt the combined company’s business.
Potential difficulties the combined company may encounter in the integration process include the following:
• the integration of management teams, strategies, technologies and operations, products and services;
• the disruption of ongoing businesses and distraction of their respective management teams from ongoing business concerns;
•the retention of and possible decrease in business from the existing customers of both companies;
•the creation of uniform standards, controls, procedures, policies and information systems;
•the reduction of the costs associated with each company’s operations;
•the integration of corporate cultures and maintenance of employee morale;
•the retention of key employees; and
•potential unknown liabilities associated with the Merger.
The anticipated cost savings, synergies and other benefits of the Merger assume a successful integration of the companies and are based on projections and other assumptions, which are inherently uncertain. Even if integration is successful, anticipated cost savings, synergies and other benefits may not be achieved.
II-VI and Coherent have incurred, and will incur, significant transaction-related costs in connection with the Merger.
Each of II-VI and Coherent has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement, as well as the costs and expenses of filing, printing and mailing this joint proxy statement/prospectus, and filing and other fees paid or to be paid to the SEC and other regulatory agencies in connection with the Merger. These fees and costs will be significant. In addition, II-VI will incur significant costs with respect to the financings for the cash consideration to be paid in connection with the Merger. If the Merger is not completed, II-VI and Coherent may have to recognize these expenses without realizing the expected benefits of the Merger.
In addition, II-VI and Coherent also expect to incur a number of non-recurring transaction-related costs associated with combining the operations of the two companies and achieving desired synergies. Additional unanticipated costs may be incurred in the integration of the businesses of II-VI and Coherent. There can be no assurance that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of the two businesses, will offset the
38
incremental transaction-related costs over time. Thus, any net benefit may not be achieved in the near term, the long term or at all.
Our pending acquisition of Coherent is subject to conditions, including certain conditions that may not be satisfied, and may not be completed on a timely basis, or at all. In addition, the Merger Agreement may be terminated in certain circumstances. Failure to complete the Merger could have material and adverse effects on us.
The completion of the Merger is subject to a number of conditions, which make the completion and timing of the completion of the Merger uncertain. In addition, the Merger Agreement may be terminated in certain circumstances. If the merger is not completed on a timely basis, or at all, II-VI's and Coherent's respective ongoing businesses may be adversely affected and, without realizing any of the benefits of having completed the Merger, II-VI and Coherent will be subject to a number of risks, including the following:
•II-VI and Coherent will be required to pay certain costs relating to the Merger, whether or not the Merger is completed, such as legal, accounting, financial advisor and printing fees;
•under the Merger Agreement, each of II-VI and Coherent is subject to certain restrictions on the conduct of its business prior to completing the Merger, which may adversely affect its ability to execute certain of its business strategies;
•time and resources committed by II-VI’s and Coherent’s respective management to matters relating to the Merger could otherwise have been devoted to pursuing other beneficial opportunities;
•the market price of II-VI Common Stock could decline to the extent that the current market prices reflect a market assumption that the Merger will be completed;
•depending on the circumstances in which the Merger Agreement is terminated, II-VI may be required to pay a termination fee of $337.7 million of $500 million, as applicable, or Coherent may be required to pay a termination fee of $108.8 million, which termination fees may make it more difficult for II-VI and Coherent to pursue alternatives to the Merger; and
•if the Merger Agreement is terminated in certain circumstances, II-VI or Coherent may be required to pay the other $25 million to cover the other party's costs and expenses in connection with the Merger Agreement.
In addition, if the Merger is not completed, II-VI may experience negative reactions from the financial markets and from its customers and employees. II-VI could also be subject to litigation related to any failure to complete the Merger or to enforcement proceedings commenced against II-VI to perform its obligations under the Merger Agreement. If the Merger is not completed, II-VI cannot assure its shareholders that the risks described above will not materialize and will not adversely affect the business, financial results and market price of II-VI Common Stock.
Each of II-VI and Coherent is subject to business uncertainties and contractual restrictions while the Merger is pending, which could adversely affect each of Coherent's and II-VI’s business and operations.
Under the terms of the Merger Agreement, Coherent and II-VI are subject to certain restrictions on the conduct of their respective business prior to completing the Merger, which may adversely affect each party’s ability to execute certain of its business strategies. Such limitations could negatively affect each party’s businesses and operations prior to the completion of the Merger. Furthermore, the process of planning to integrate two businesses and organizations for the post-Merger period can divert management attention and resources and could ultimately have an adverse effect on each of Coherent and II-VI.
In connection with the Merger, parties with which Coherent or II-VI does business may experience uncertainty associated with the Merger, including with respect to current or future business relationships with Coherent, II-VI or the combined business. It is possible that some customers, suppliers and other persons with whom Coherent or II-VI has a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with Coherent or II-VI, as applicable, as a result of the Merger, which could negatively affect Coherent's or II-VI’s revenues, earnings and cash flows, as well as the market price of shares of II-VI Common Stock, regardless of whether the Merger is completed.
The market price of II-VI Common Stock may decline in the future as a result of the Merger.
The market price of II-VI Common Stock may decline in the future as a result of the Merger for a number of reasons, including:
•the unsuccessful integration of Coherent and II-VI (including for the reasons set forth in the preceding risk factor);
•the failure of the combined company to achieve the perceived benefits of the Merger, including financial results, as rapidly as or to the extent anticipated by financial or industry analysts.
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These factors are, to some extent, beyond the control of II-VI. As a consequence, II-VI shareholders could lose the value of their investment in II-VI Common Stock.
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 March 31, 2021, the Company has cumulatively purchased 1,416,587 shares of its Common Stock pursuant to the Program for approximately $22.3 million. The dollar value of shares that may yet be purchased under the Program is approximately $27.7 million.
The following table sets forth repurchases of our Common Stock during the quarter ended March 31, 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 | ||||||||||||||||||||||
| January 1, 2021 to January 31, 2021 | 5,163 | (1) | $ | 87.23 | — | $ | 27,658,759 | |||||||||||||||||||
| February 1, 2021 to February 28, 2021 | 1,871 | (1) | $ | 83.21 | — | $ | 27,658,759 | |||||||||||||||||||
| March 1, 2021 to March 31, 2021 | 8,159 | (1) | $ | 72.28 | — | $ | 27,658,759 | |||||||||||||||||||
| Total | 15,193 | $ | 78.71 | — | ||||||||||||||||||||||
(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 | ||||||||||||
| 2.01 | Incorporated herein by reference to Exhibit 2.1 to II-VI's Current Report on Form 8-K (File No. 001-39375) filed on March 1, 2021. | |||||||||||||
| 3.01 | Incorporated herein by reference to Exhibit 3.1 to II-VI's Current Report on Form 8-K (File No. 000-16195) filed on November 8, 2011. | |||||||||||||
| 3.02 | Incorporated herein by reference to Exhibit 3.03 to II-VI's Annual Report on Form 10-K (File No. 001-39375) filed on August 26. 2020. | |||||||||||||
| 3.03 | Incorporated herein by reference to Exhibit 3.1 to II-VI's Current Report on Form 8-K (File No. 001-39375) filed on March 31, 2021. | |||||||||||||
| 3.04 | Incorporated herein by reference to Exhibit 3.1 to II-VI's Current Report on Form 8-K (File No. 001-39375) filed on March 1, 2021. | |||||||||||||
| 10.01 | Incorporated herein by reference to Exhibit 10.1 to II-VI's Current Report on Form 8-K (File No. 001-39375) filed on March 31, 2021. | |||||||||||||
| 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. | |||||||||||||
| * | Certain of the schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Company agrees to furnish supplementally a copy of all omitted exhibits and schedules to the SEC upon its request. | |||||||||||||
41
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: May 7, 2021 | By: | /s/ Vincent D. Mattera, Jr. | ||||||
| Vincent D. Mattera, Jr Chief Executive Officer | ||||||||
| Date: May 7, 2021 | By: | /s/ Mary Jane Raymond | ||||||
| Mary Jane Raymond Chief Financial Officer and Treasurer | ||||||||
42