COHERENT CORP.
Forward-Looking Statements
Certain statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("Management Discussion and
Analysis") 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," "believes,"
"intends," "plans," "projects" or similar expressions.
Although our management considers these expectations and assumptions 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 Annual
Report on Form 10-K include, but are not limited to: (i) the failure of any one
or more of the assumptions stated above to prove to be correct; and (ii) the
risks relating to forward-looking statements and other "Risk Factors" discussed
herein at Item 1A. 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.
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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 Annual Report on Form 10-K 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
industrial materials processing, communications, 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.
In September 2019 , the Company completed its acquisition Finisar Corporation
("Finisar"), See Note 3. Acquisitions, to our Consolidated Financial Statements
contained in Item 8 of this Annual Report on Form 10-K. The operating results of
this acquisition have been reflected in the selected financial information of
the Company's Photonic Solutions segment and Compound Semiconductors Segment
beginning on October 1, 2019 , with the results from September 24, 2019 to
September 30, 2019 reflected in Unallocated and Other.
Finisar is a global technology leader in optical communications, providing
components and subsystems to networking equipment manufacturers, data center
operators, telecom service providers, consumer electronics and automotive
companies. Finisar, headquartered in Sunnyvale, California , designs products
that meet the increasing demands for network bandwidth, data storage and 3D
sensing subsystems. As part of the Finisar acquisition, the Company entered into
a new Amended and Restated Credit Agreement, dated as of September 24 2019 . This
agreement secured $2.425 billion in aggregate principle amount of senior secured
credit facilities. See Note 9. Debt, to our Consolidated Financial Statements
contained in Item 8 of this Annual Report on Form 10-K.
On June 30, 2020 , the Company announced its intention to offer, in concurrent
underwritten public offerings, newly issued shares of its common stock and newly
issued shares of its Series A Mandatory Convertible Preferred Stock, "Mandatory
Convertible Preferred Stock"). In addition, the underwriters were granted a
30-day option to purchase additional shares of its common stock at the
applicable public offering price, less underwriting discounts and commissions,
and 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. See Note 21.
Subsequent Event, to our Consolidated Financial Statements contained in Item 8
of this Annual Report on Form 10-K 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.
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--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted inthe United States requires the Company's management to make judgments, assumptions and estimates that affect the amounts reported in its Consolidated Financial Statements and accompanying notes. Note 1. Nature of Business and Summary of Significant Accounting Policies, of the Notes to our Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K describes the significant accounting policies and accounting methods used in the preparation of the Company's Consolidated Financial Statements. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates. Management has discussed the development and selection of the critical accounting policies and estimates described below with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the related disclosure. In addition, there are other items within our Consolidated Financial Statements that require estimation but are not deemed critical. Changes in estimates used in these and other items could impact the Consolidated Financial Statements. Business Combinations The Company accounts for business acquisitions under the acquisition method of accounting whereby the total purchase price is allocated to tangible and intangible assets acquired and liabilities assumed based on the respective fair values. In determining the fair value of intangible assets acquired, the Company must make assumptions about the future performance of the acquired business, including among other things, the forecasted revenue growth attributable to the asset group and projected operating expenses inclusive of expected synergies, including future cost savings, and other benefits expected to be achieved by combining the Company and Finisar. The Company's intangible assets are comprised of customer relationships, trade names and developed technology. The estimated fair value of the customer relationships, trade names and developed technology are determined using the multi-period excess earnings method and relief from royalty methods. Both methods require forward looking estimates that are discounted to determine the fair value of the intangible asset using a risk-adjusted discount rate that is reflective of the level of risk associated with future estimates associated with the asset group that could be affected by future economic and market conditions. The estimated fair value of the developed technology is also dependent on the selection of the royalty rate used in the valuation method. Different assumptions for certain intangible assets may result in materially different values for these assets, which would impact the Company's financial position and future results of operations.
The Company tests goodwill for impairment annually, and when events or changes in circumstances indicate that goodwill might be impaired. The determination of whether goodwill is impaired requires us to make judgments based on long-term projections of future performance. Estimates of fair value are based on our projection of revenues, operating costs and cash flows of each reporting unit, considering historical and anticipated results and general economic and market conditions and their projections. For fiscal year 2020, the fair values of the reporting units were determined using a discounted cash flow analysis with projected financial information based on our most recently completed long-term strategic planning processes and also considers the current financial performance compared to our prior projections of the reporting unit. As ofJune 30, 2020 , no reporting units are at risk for impairment. Due to the cyclical nature of our business, and the other factors described in the section on Risk Factors set forth in Item 1A of this Annual Report on Form 10-K, the profitability of our individual reporting units may periodically be affected by downturns in customer demand, operational challenges and other factors. If material adverse conditions occur that impact one or both of our reporting units, our determination of future fair value might not support the carrying amount of one or both of our reporting units, and the related goodwill would need to be impaired. 45 --------------------------------------------------------------------------------
Income Taxes
The Company prepares and files tax returns based on its interpretation of tax laws and regulations and records estimates based on these judgments and interpretations. In the normal course of business, the Company's tax returns are subject to examination by various taxing authorities, which may result in future tax, interest and penalty assessments by these authorities. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law and the issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. The Company believes that its estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of its tax returns. The Company recognizes both accrued interest and penalties related to unrecognized tax benefits in income tax expense. Management evaluates the realizability of deferred tax assets for each jurisdiction in which it operates. If the Company experiences cumulative pretax income in a particular jurisdiction in a three-year period including the current and prior two years, management normally concludes that the income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments, or changes in tax laws, would lead management to conclude otherwise. However, if the Company experiences cumulative pretax losses in a particular jurisdiction in a three-year period, management then considers a series of factors in the determination of whether the deferred tax assets can be realized. The Company has recorded valuation allowances against certain of its deferred tax assets, primarily those that have been generated from net operating losses in certain foreign taxing jurisdictions and acquiredU.S. carryforwards. In evaluating whether the Company would more likely than not recover these deferred tax assets, it has not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carryforwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these valuation allowances and a reduction of income tax expense. COVID-19 Update OnMarch 11, 2020 , theWorld 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 shelter-in-place 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 inChina . While these operations have returned to active service, approximately 45% of our global facilities are subject to a government order, including approximately 10% that are currently closed, most of which are administrative facilities where employees are working remotely. Certain of our customers and suppliers currently are impacted by similar operational restrictions. Our focus has been on the protection of the health and safety of our employees and business partners. In our facilities, we have deployed new safety measures, including guidance to employees on matters such as effective hygiene and disinfection, social distancing, limited and remote access working where feasible and use of protective equipment. We also are prioritizing efforts to understand and support the changing business needs of our customers and suppliers in light of restrictions that are applicable to them. At this time, we believe that our existing balances of cash and cash equivalents, along with our existing committed borrowing availability and other short-term liquidity arrangements, will be sufficient to satisfy our working capital needs, make necessary capital asset purchases and debt repayments and meet other liquidity requirements associated with our existing operations. Likewise, our current estimates indicate that we will remain in compliance with financial covenants applicable under our debt arrangements. 46 -------------------------------------------------------------------------------- The full extent of the impact of the COVID-19 pandemic and the related responses on our operational and financial performance is currently uncertain and will depend on many factors outside our control, including, without limitation, the duration and severity of the pandemic, the imposition of protective public safety measures, and the impact of the pandemic on the global economy as a whole and, in particular, demand for our products. Due to these uncertainties, we cannot reasonably estimate the related impact on us at this time. For additional information regarding the risks that we face as a result of the COVID-19 pandemic, please see Item 1A, Risk Factors, in Part I of this Form 10-K. Further, to the extent the COVID-19 pandemic adversely affects our business and financial results, it also may have the effect of heightening many of the other risks described in the risk factors in Item 1A of this Form 10-K. Fiscal Year 2020 Compared to Fiscal Year 2019 The Company aligns its organizational structure into the following two reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. The Company is reporting financial information (revenue and operating income) for these reporting segments in this Annual Report on Form 10-K. The following table sets forth select items from our Consolidated Statements of Earnings (Loss) for the years endedJune 30, 2020 and 2019 ($ in millions except per share information): Year Ended June 30, Year Ended June 30, 2020 2019 % of % of Revenues Revenues Total revenues$ 2,380.1 100.0 %$ 1,362.4 100.0 % Cost of goods sold 1,560.5 65.6 % 841.1 61.7 % Gross margin 819.6 34.4 521.3 38.3 Operating expenses: Internal research and development 339.1 14.2 139.2 10.2 Selling, general and administrative 441.0 18.5 233.5 17.1 Interest and other, net 103.4 4.3 19.8 1.5 Earnings (Loss) before income tax (63.9) (2.7) 128.8 9.5 Income taxes 3.1 0.1 21.3 1.6 Net earnings (loss)$ (67.0) (2.8) %$ 107.5 7.9 % Diluted earnings (loss) per share$ (0.79) $ 1.63 Consolidated Revenues. Revenues for the year endedJune 30, 2020 increased 75% to$2,380.1 million , compared to$1,362.4 million for the prior fiscal year. The increase in revenues is primarily attributed to the acquisition of Finisar, which contributed$938.4 million of revenues for the fiscal year endedJune 30, 2020 . In addition to the acquisition of Finisar, the increase in revenues within Photonic Solutions was driven by increased demand from customers in the optical communication market, ROADM and other optical communication products addressing the growing deployment of 5G optical networks. Compound Semiconductors recorded a 13% revenue increase during the current fiscal year, which in addition to revenues from Finisar, was driven by strengthening demand for SiC substrate products addressing RF electronics and high-power switching systems. This segment also realized increased revenues from its aerospace and defense products addressing strengthening demand from customers in the intelligence, surveillance and reconnaissance markets. Gross margin. Gross margin for the year endedJune 30, 2020 was$819.6 million , or 34.4%, of total revenues, compared to$521.3 million , or 38.3% of total revenues, for the same period last fiscal year. Gross margin as a percentage of revenues decreased 380 basis points compared to the prior fiscal year despite the 75% increase in revenues during this same period. Gross margin was negatively impacted by additional cost of goods sold of$87.7 million related to the fair value adjustment of the acquired Finisar inventory, and as the result of product mix relating to Finisar's Transceiver product line which has a lower gross margin profile than the Company's historical margins. 47 -------------------------------------------------------------------------------- Internal research and development. Company-funded internal research and development ("IR&D") expenses for the fiscal year endedJune 30, 2020 were$339.1 million , or 14.2% of revenues, compared to$139.2 million , or 10.2%. of revenues, last fiscal year. The increase in IR&D expenses is primarily due to the Company continuing to invest in new products and processes across all its businesses including investments in 5G technology, 3D Sensing, indium phosphide, LIDAR and other emerging market trends. Selling, general and administrative. Selling, general and administrative ("SG&A") expenses for the year endedJune 30, 2020 were$441.0 million , or 18.5% of revenues, compared to$233.5 million , or 17.1% of revenues, last fiscal year. The increase in SG&A was primarily the result of transaction costs incurred relating to the acquisition of Finisar as well as the SG&A from the Finisar acquisition. Interest and other, net. Interest and other, net for the year endedJune 30, 2020 was expense of$103.4 million compared to expense of$19.8 million last fiscal year. Interest and other, net primarily includes$89.4 million for interest expense on borrowings,$14.4 million of foreign currency losses, and$2.8 million of equity earnings from unconsolidated investments. Interest expense increased due to the higher levels of outstanding debt incurred in conjunction with the acquisition of Finisar. In addition, the Company expensed$4.0 million of debt extinguishment costs during the current fiscal year and recorded a$5.0 million impairment charge for an unconsolidated investment as its carrying value was determined to be unrecoverable. Income taxes. The Company's year-to-date effective income tax rate atJune 30, 2020 was a (4.9)% benefit, compared to an effective tax rate of 16.6% last fiscal year. The current fiscal year's effective tax rate was negatively impacted by theU.S. enacted tax legislation related to global intangible low tax income ("GILTI") partially offset by research and development incentives in certain jurisdictions. Segment Reporting Revenues and operating income for the Company's reportable segments are discussed below. Operating income differs from income from operations in that operating income excludes certain operational expenses included in other expense (income), net, as reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance over which management has direct control and is used by management in its evaluation of segment performance. See Note 14. Segment and Geographic Reporting to the Company's Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information on the Company's reportable segments and for the reconciliation of operating income to net earnings, which is incorporated herein by reference. EffectiveJuly 1, 2019 , the Company realigned its composition of its operating segments. The Company combined II-VI Laser Solutions and II-VI Performance Products, and renamed the combined segment Compound Semiconductors. All applicable segment information has been restated to reflect this change. Additionally, the Company changed the name ofII-VI Photonics to Photonic Solutions. Photonic Solutions ($ in millions) Year Ended % June 30, Increase/(Decrease) 2020 2019 Revenues$ 1,536.8 $ 638.9 141 % Operating income$ 49.9 $ 81.9 (39) % The above operating results for the year endedJune 30, 2020 include the Company's acquisition of Finisar inSeptember 2019 . Revenues for the year endedJune 30, 2020 for Photonic Solutions increased 141% to$1,536.8 million , compared to$638.9 million for last fiscal year. Included in the current year's revenues were$903.5 million of revenues from the Finisar acquisition. Exclusive of the acquisition, the increase in revenues was attributed to increased demand of our 5G optical networks driven by theChina broadband initiative. Operating income for the year endedJune 30, 2020 for Photonic Solutions decreased 39% to$49.9 million , compared to an operating income of$81.9 million last fiscal year. The decrease in operating income was primarily due to acquisition related expenses related to amortization expense on acquired intangible assets and the expensing of acquired inventory fair value step-up partially offset by incremental margin realized on increased revenues during the year. 48 --------------------------------------------------------------------------------
Compound Semiconductors ($ in millions)
Year Ended %
June 30, Increase/(Decrease)
2020 2019
Revenues $ 821.2 $ 723.6 13 %
Operating income $ 62.3 $ 82.4 (24 %)
The above operating results for the year ended
Revenues for the fiscal year endedJune 30, 2020 for Compound Semiconductors increased 13% to$821.2 million , compared to revenues of$723.6 million last fiscal year. The increase in revenues during the current fiscal year was primarily driven by increased VCSEL product shipments addressing the 3D sensing commercial market, and increased revenues to customers in the aerospace and defense market. Operating income for the fiscal year endedJune 30, 2020 for Compound Semiconductors decreased 24% to$62.3 million , compared to operating income of$82.4 million last fiscal year. The decrease in operating income during the current fiscal year was primarily driven by the acquisition of Finisar, which includes unabsorbed operating costs incurred at the segment'sSherman, Texas water fabrication facility, during the qualification phase. In addition, the segment incurred acquisition related expenses associated with expensing of the fair value inventory write-up and other related acquisition expenses. Fiscal Year 2019 Compared to Fiscal Year 2018 The Company aligned its organizational structure into the following two reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. The Company is reporting financial information (revenue and operating income) for these reporting segments in this Annual Report on Form 10-K. The following table sets forth select items from our Consolidated Statements of Earnings for the years endedJune 30, 2019 and 2018 ($ in millions except per share information): Year Ended Year Ended June 30, 2019 June 30, 2018 % of % of Revenues Revenues Total revenues$ 1,362.4 100.0 %$ 1,158.8 100.0 % Cost of goods sold 841.1 61.7 696.6 60.1 Gross margin 521.3 38.3 462.2 39.9 Operating expenses: Internal research and development 139.2 10.2 116.9 10.1 Selling, general and administrative 233.5 17.1 208.6 18.0 Interest and other, net 19.8 1.5 14.6 1.3 Earnings before income tax 128.8 9.5 122.2 10.5 Income taxes 21.3 1.6 34.2 3.0 Net earnings$ 107.5 7.9 %$ 88.0 7.5 % Diluted earnings per share$ 1.63 $ 1.35 49
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Consolidated
Revenues. Revenues for the year endedJune 30, 2019 increased 18% to$1,362.4 million , compared to$1,158.8 million for fiscal year 2018. The increase in revenues during fiscal year 2019 was driven by strong demand from customers across the majority of the Company's business units. In particular, Photonic Solutions experienced a 31% revenue growth from the prior fiscal year 2018, primarily driven by increased demand from customers in the optical communication market. Specifically, the segment saw increased demand for ROADM and other optical communication products addressing the growing deployment of 5G optical networks. Compound Semiconductors recorded an 8% revenue increase during the current fiscal year, driven by strengthening demand for SiC substrate products addressing RF electronics and high-power switching and power conversion systems for automotive and communication end markets. In addition, this segment also realized increased revenues from its aerospace and defense products addressing strengthening demand from customers in the intelligence, surveillance and reconnaissance markets. Gross margin. Gross margin for the year endedJune 30, 2019 was$521.3 million , or 38.3%, of total revenues, compared to$462.2 million , or 39.9% of total revenues, for fiscal year 2018. Gross margin as a percentage of revenues decreased 160 basis points compared to the prior fiscal year despite the 18% increase in revenues during this same period. The Company's Photonic Solutions' gross margin was negatively impacted by a shift in product mix to lower margin products while Compound Semiconductors experienced under-absorption of manufacturing costs for its 3D Sensing product line due to continued delays in the program and underutilization of capacity. Internal research and development. Company-funded IR&D expenses for the fiscal year endedJune 30, 2019 were$139.2 million , or 10.2% of revenues, compared to$116.9 million , or 10.1% of revenues, for fiscal year 2018. The increase in IR&D expenses is primarily due to the Company continuing to invest in new products and processes across all its businesses including investments in 5G technology, 3D Sensing and other engineered material applications. IR&D expenses as a percentage of revenues were consistent between both fiscal years, and the Company anticipates this percentage to continue to range between 10% and 15% of revenues as the Company continues investing in new product and process development. Selling, general and administrative. SG&A expenses for the year endedJune 30, 2019 were$233.5 million , or 17.1% of revenues, compared to$208.6 million , or 18.0% of revenues, for fiscal year 2018. During fiscal year 2019, the Company announced its intention to acquire Finisar, and incurred approximately$15.6 million of related transaction expenses. In addition to the transaction expenses, the Company incurred higher SG&A expenses to support its growing revenue base. The Company has been successful in capitalizing on synergies from its recent acquisitions to improve its operating leverage. Interest and other, net. Interest and other, net for the year endedJune 30, 2019 was expense of$19.8 million compared to expense of$14.6 million for fiscal year 2018. Included in interest and other, net were interest expense on long-term borrowings, earnings from equity investments, interest income on excess cash reserves, unrealized gains and losses on the Company's deferred compensation plan, and foreign currency gains and losses. The increase in interest and other, net was primarily due to increased interest expense during the current fiscal year of approximately$4.1 million due to the higher levels of outstanding debt. Income taxes. The Company's year-to-date effective income tax rate atJune 30, 2019 was 16.6%, compared to an effective tax rate of 28.0% for fiscal year 2018. Fiscal year 2018's effective tax rate was negatively impacted by theU.S. enacted tax legislation and the recording the provision for the transition tax under the new tax law. Photonic Solutions ($ in millions) Year Ended % June 30, Increase 2019 2018 Revenues 638.8 486.5 31 % Operating income 81.9 63.2 30 %
The above operating results for the year ended
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Revenues for the year ended June 30, 2019 for Photonic Solutions increased 31%
to $638.8 million , compared to $486.5 million for fiscal year 2018. Included in
the fiscal year's 2019 revenues were $12.4 million of revenues, excluding sales
to customers through our sales offices, from the above acquisitions. Exclusive
of these acquisitions, the increase in revenues was primarily attributed to
increased demand for optical communication products driven by the China
broadband initiative as China continues to build out its broadband
networks. Specifically, the segment saw increased demand for its ROADM and EDFA
product lines to address this and other market demands, including the
accelerating demand for 5G technology.
Operating income for the year ended June 30, 2019 for Photonic Solutions
increased 30% to $81.9 million , compared to an operating income of $63.2 million
for fiscal year 2018. The increase in operating income was primarily due to
incremental margin realized on increased revenues.
Compound Semiconductors ($ in millions)
Year Ended %
June 30, Increase
2019 2018
Revenues $ 723.6 $ 672.3 8 %
Operating income $ 82.4 $ 73.6 12 %
Revenues for the fiscal year ended June 30, 2019 for Compound Semiconductors
increased 8% to $723.6 million , compared to revenues of $672.3 million for
fiscal year 2018. The increase in revenues during fiscal year 2019 was primarily
driven by increased demand for SiC products addressing RF electronics and
high-power switching and power conversion systems for automotive and
communication markets. In addition, the segment has seen increased demand for
products and components for its thermoelectric and aerospace and defense
markets.
Operating income for the fiscal year ended June 30, 2019 for Compound
Semiconductors increased 12% to $82.4 million , compared to operating income of
$73.6 million for fiscal year 2018. The increase in operating income during
fiscal year 2019 was primarily driven by incremental margin realized by
increased sales volume, as well as favorable product mix toward higher margin
products.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary sources of cash have been provided from operations,
long-term borrowing, and advance funding from customers. Other sources of cash
include 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, investments in research and development, business acquisitions,
payments of principal and interest on outstanding debt obligations, payments of
debt issuance costs to obtain financing, payments in satisfaction of employees'
minimum tax obligations and purchases of treasury stock. Supplemental
information pertaining to our sources and uses of cash for the periods indicated
is presented as follows:
Sources (uses) of Cash (millions):
Year Ended June 30, 2020 2019 2018
Net cash provided by operating activities $ 297.3 $ 178.5 $ 161.0
Proceeds on new long-term borrowings 2,121.0 - -
Proceeds from exercises of stock options 13.5 8.7 10.5
Proceeds from prior credit facility and other
borrowings 10.0 150.0 445.0
Purchases of businesses, net of cash acquired (1,036.6) (83.1) (80.5)
Payments of Finisar Notes (560.1) - -
Payments under prior term loan and credit facility (176.6) (135.0) (292.0)
Payments under new long-term borrowings and credit facility
(137.9) - -
Additions to property, plant & equipment (136.9) (137.1) (153.4)
Debt issuance costs (63.5) (5.6) (10.1)
Payments in satisfaction of employees' minimum tax obligations
(28.7) (7.1) (6.6)
Common stock repurchases (1.6) (1.6) (49.9)
Effect of exchange rate changes on cash and cash
equivalents and other items (11.7) (9.9) (48.9)
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Net cash provided by operating activities:
Net cash provided by operating activities was $297.3 million and $178.5 million
for the fiscal years ended June 30, 2020 and 2019, respectively. The increase in
cash flows provided by operating activities during the current fiscal year ended
compared to the same period last fiscal year was primarily driven by increased
non-cash charges for depreciation and amortization as well as overall favorable
changes in working capital offset by lower earnings as a result of
acquisition-related expenses incurred for the acquisition of Finisar.
Acquisition-related expenses include transaction expenses, expensing of the fair
value write-up of acquired inventory and increased depreciation and amortization
charges for acquired property, plant and equipment and intangible assets.
Net cash provided by operating activities was $178.5 million and $161.0 million
for the fiscal years ended June 30, 2019 and 2018, respectively. The increase in
cash provided by operations was due to a combination of higher net earnings as
well as non-cash items such as depreciation, amortization, and share-based
compensation expense and improved working capital management of accounts
payable.
Net cash used in investing activities:
Net cash used in investing activities was $1,179.3 million and $224.0 million
for the fiscal years ended June 30, 2020 and 2019, respectively. Net cash used
in investing activities during the current period primarily included $1,036.6
million for net cash paid for the acquisition of Finisar, and $136.9 million of
cash paid for property, plant and equipment to increase capacity to meet the
growing demand for the Company's product portfolio.
Net cash used in investing activities was $224.0 million and $285.0 million for
the fiscal years ended June 30, 2019 and 2018, respectively. The decrease in
cash used in investing activities was the result of lower level of investments
in property, plant & equipment as the Company continues to strategically
allocate resources.
Net cash provided by financing activities:
Net cash provided by financing activities was $1,173.6 million for the year
ended June 30, 2020 compared to net cash provided by financing activities of
$4.9 million for the year ended June 30, 2019 . Net cash provided by financing
activities during the current fiscal year included net borrowings on long-term
debt of $1,256.4 million primarily to fund the acquisition of Finisar, and $13.5
million of cash received from exercises of stock options. Net cash provided by
financing activities was offset by $63.5 million of debt issuance costs
associated with the increased borrowings, $28.7 million of cash payments in
satisfaction of employees' minimum tax obligations from the vesting of equity
awards and a $1.6 million payment to repurchase common stock through the
Company's share repurchase program.
Net cash provided by financing activities was $4.9 million for the year ended
June 30, 2019 compared to net cash provided by financing activities of $97.0
million for the year ended June 30, 2018 . During the year ended June 30, 2019 ,
the Company had net borrowings of $15.0 million . The Company realized $8.7
million of proceeds received from the exercise of stock options offset, by $7.1
million of cash payments in satisfaction of employees' minimum tax obligations
on the vesting of the Company's restricted and performance shares during the
current fiscal year. In addition, the Company incurred approximately $1.6
million of purchases of treasury stock and $5.6 million of debt issuance costs
associated with its pending financing of the cash consideration payable in
connection with its Finisar acquisition.
Senior Credit Facilities
On September 24, 2019 , in connection with the Finisar acquisition, the Company
entered into a Credit Agreement (the "Credit Agreement") 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 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") and
(iii)Aggregate principal amount of $450 million for a five-year senior secured
first-lien revolving credit facility (the "Revolving Credit Facility" and
together with the Term Loan Facilities, the "Senior Credit Facilities").
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The Credit Agreement also provides for a letter of credit sub-facility not to
exceed $25.0 million and a swing loan sub-facility initially not to exceed
$20.0 million .
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 the Closing Date. Similarly, the
Company is obligated to repay the outstanding principal amount of the Term B
Facility in quarterly installments equal to 0.25% of the initial aggregate
principal amount of the Term B Facility, with the remaining outstanding balance
due and payable on the seventh anniversary of the Closing Date. The Company is
obligated to repay the aggregate principal amount of all outstanding revolving
loans made under the Revolving Credit Facility on the fifth anniversary of 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 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.
The Company voluntarily may prepay, at any time or from time to time, any
amounts outstanding under the Senior Credit Facilities in whole or in part
without premium or penalty; except for the Term B Facility, pursuant to which in
the event of (a) a repayment made before September 24, 2020 , (b) the occurrence
of a repricing event, or (c) a change to the lenders, the Company will be
subject to a prepayment premium in an amount equal to one percent of: (i) the
principal amount of the Term B Facility that is prepaid under an optional or
mandatory prepayment due to a repricing event, (ii) the aggregate outstanding
principal amount of the Term B Facility resulting from an amendment to the
Credit Agreement, and (iii) the principal amount of the Term B Facility that is
mandatorily assigned. The Company may be subject to mandatory prepayment of
amounts outstanding under the Senior Credit Facilities under certain
circumstances, including in connection with certain asset sales or other
dispositions of property and debt issuances.
The Company also may be required to prepay amounts under the Term B Facility
based on the Company's excess cash flow (as calculated in accordance with the
terms of the Credit Agreement) for the Company's prior fiscal year beginning
with its fiscal year ending June 30, 2020 and the Company's consolidated secured
net leverage ratio (as calculated in accordance with the terms of the Credit
Agreement) as of the end of such fiscal year.
Amounts outstanding under the Senior Credit Facilities will bear interest at a
rate per annum equal to an applicable margin over a eurocurrency rate or an
applicable margin over a base rate determined by reference to the highest of (a)
the federal funds rate plus 0.50%, (b) Bank of America, N.A.'s prime rate and
(c) a eurocurrency rate plus 1.00%, in each case as calculated in accordance
with the terms of the Credit Agreement. The applicable interest rate would
increase under certain circumstances relating to events of default. The Company
has entered into an interest rate swap contract to hedge its exposure to
interest rate risk on its variable rate borrowings under the Senior Credit
Facilities. Refer to Note 15 for further information regarding this interest
rate swap.
The Credit Agreement contains customary affirmative and negative covenants with
respect to the Senior Credit Facilities, including limitations with respect to
liens, investments, indebtedness, dividends, mergers and acquisitions,
dispositions of assets and transactions with affiliates. The Company will be
obligated to maintain a consolidated interest coverage ratio (as calculated in
accordance with the terms of the Credit Agreement) as of the end of each fiscal
quarter of not less than 3.00:1.00. 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 June 30,
2020 , the Company was in compliance with all financial covenants under the
Credit Agreement.
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The Company incurred $69.8 million of debt issuance costs in connection with the
Senior Credit Facilities. The Company evaluated these costs to determine
appropriate recognition of expense under Accounting Standards Codification 470,
Debt to account for debt modification and extinguishment. As a result of the
Company's assessment, $65.8 million have been capitalized in the Consolidated
Balance Sheet. Debt extinguishment costs of $4.0 million were expensed in other
expense (income), net in the Consolidated Statement of Earnings (Loss) during
the twelve months ended June 30, 2020 . The Company expensed $2.9 million and
$8.8 million of capitalized debt issuance costs during the three and twelve
months ended June 30, 2020 , respectively, in interest expense in the
Consolidated Statement of Earnings (Loss). The capitalized costs are being
amortized to interest expense using the effective interest rate method from the
issuance date of September 24, 2019 , through the end of each facility. The
unamortized debt issuance costs of $56.9 million as of June 30, 2020 are being
amortized over five and seven years, for the Term A Facility and Revolving
Credit Facility, and the Term B Facility, respectively.
On June 30, 2020 , the Company announced its intention to offer, in concurrent
underwritten public offerings, newly issued shares of its common stock and newly
issued shares of its Series A Mandatory Convertible Preferred Stock. On July 7,
2020 , the Company used the proceeds from the public offerings to pay off the
remaining balance of $715.2 million of the Term B Loan Facility. See Note 21 for
further details.
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 the Company at a redemption price equal to one hundred
percent (100%) of the principal amount of such Finisar Notes plus accrued and
unpaid interest. Each holder of Finisar Notes also may require Finisar to
repurchase all or any portion of such holder's outstanding Finisar Notes for
cash on December 15, 2021 , December 15, 2026 and December 15, 2031 at a
repurchase price equal to one hundred percent (100%) of the principal amount of
such Finisar Notes plus accrued and unpaid interest. The Finisar Notes will
mature on December 15, 2036 . Interest on the Finisar Notes accrues at 0.50% per
annum, paid semi-annually, in arrears, on June 15 and December 15 of each year.
In connection with the acquisition of Finisar, the Company, Finisar and Wells
Fargo Bank, National Association , as 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 Company's 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 Company 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. The Company 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 June 30, 2020 ,
approximately $14.9 million in aggregate principal amount of Finisar Notes
remain outstanding.
Aggregate Availability
The Company had aggregate availability of $374.6 million under its Revolving
Credit Facility as of June 30, 2020 .
Weighted Average Interest Rate
The weighted average interest rate of total borrowings was 3.4% and 1.6% for the
year ended June 30, 2020 and 2019, respectively.
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Share Repurchase Programs
In August 2017 , in conjunction with the Company's offering and sale of our 0.25%
outstanding convertible senior notes, the Company's Board of Directors
authorized the Company to purchase up to $50 million of its common stock with a
portion of the net proceeds received from the offering and sale of those
convertible notes. The shares that were purchased by the Company pursuant to
this authorization were retained as treasury stock and are available for general
corporate purposes. The Company purchased 1,414,900 shares of its common stock
for approximately $49.9 million pursuant to this authorization.
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.
During each of the fiscal years ended June 30, 2020 and June 30, 2019 , the
Company purchased 50,000 shares of its common stock for $1.6 million under this
program. As of June 30, 2020 , 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 as of June 30, 2020 that may yet be
purchased under the Program is approximately $27.7 million .
Our cash position, borrowing capacity and debt obligations are as follows (in
millions):
June 30, 2020 June 30, 2019
Cash and cash equivalents
374.6 211.9
Total debt obligations 2,255.3 467.0
The Company believes cash flow from operations, existing cash reserves and
available borrowing capacity from its credit facilities and its recent equity
raise will be sufficient to fund its needs for working capital, capital
expenditures, repayment of scheduled long-term borrowings and lease obligations,
investments in internal research and development, share repurchases, and
internal and external growth objectives at least through fiscal year 2021. Refer
to Note 21 of the Company's Consolidated Financial Statements for subsequent
event information regarding use of proceeds from the underwritten public
offerings in July 2020 and the impact to existing debt obligations.
The Company's cash and cash equivalent balances are generated and held in
numerous locations throughout the world, including amounts held outside the
United States . As of June 30, 2020 , the Company held approximately $350.8
million of cash and cash equivalents outside of the United States . Cash balances
held outside the United States could be repatriated to the United States .
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Off-Balance Sheet Arrangements
The Company's off-balance sheet arrangements include the purchase obligations
disclosed in the contractual obligations table below. The Company enters into
these off-balance sheet arrangements to acquire goods and services used in its
business.
Tabular Disclosure of Contractual Obligations
Payments Due By Period
Less Than 1 1-3 3-5 More Than 5
Contractual Obligations Total Year Years Years Years
($000 )
Long-term debt obligations (4)
$ 262,554 $ 53,549 $ 101,431 $ 77,574 $ 30,000 Operating lease obligations, including imputed interest$ 161,288 $ 31,100 $ 44,585 $ 33,287 $ 52,316 Finance lease obligations, including imputed interest$ 32,199 $ 2,419 $ 5,040 $ 5,321 $ 19,419 Purchase and sponsorship obligations (2) (3)$ 199,660 $ 196,937 $ 2,723 $ - $ - Total$ 2,998,651 $ 353,255 $ 652,167 $ 1,212,895 $ 780,335 (1)Interest payments represent both variable and fixed rate interest obligations based on the interest rates in effect atJune 30, 2020 relating to the Senior Credit Facilities, the currently outstanding 0.50% convertible senior notes assumed in the Finisar Acquisition, and the currently outstanding 0.25% Convertible Senior Notes due 2022. These interest payments do not reflect the impact of the interest rate swap that hedges our variable interest payments to fixed interest payments. (2)A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on the Company and that specifies all significant terms, including fixed or minimum quantities to be purchased, minimum or variable price provisions, and the approximate timing of the transaction. These amounts are primarily composed of open purchase order commitments to vendors for the purchase of supplies and materials. (3)Includes cash earn out opportunities based on certain acquisitions' achieving agreed-upon financial, operational and technology targets, and the value of the net purchase option for the Company's equity investment in a privately held company. (4)Refer to Note 21. Subsequent Event for additional information regarding use of proceeds from the underwritten public offerings inJuly 2020 . Pension obligations are not included in the table above. Estimated funding obligations are determined by asset performance, workforce and retiree demographics, tax and employment laws and other actuarial assumptions which may change the annual funding obligations. The funded status of our defined benefit plans is disclosed in Note 16 to the Company's Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.The Company's gross unrecognized income tax benefit atJune 30, 2020 has been excluded from the table above because the Company is not currently able to reasonably estimate the amount by which the liability will increase or decrease over time. 56
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