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II-VI Stays Laser Focused on Growth

Dan Caplinger, The Motley Fool

Combining a hot industry with smart operational execution is a pathway to success, and at II-VI (NASDAQ: IIVI), it's also produced strong returns for investors. With a vertically integrated operation that gives it valuable advantages over its rivals, II-VI has been able to pivot to address the most critical needs of customers while fending off fears about slower growth in the global economy, especially among industrial customers.

Coming into Wednesday's fiscal third-quarter report, II-VI investors wanted to see extremely good numbers for both sales and earnings. II-VI was able to deliver only one of those things, but even with a slight bottom-line shortfall, the laser maker appears to be following a smart long-term strategy as it looks forward to completing its deal to acquire Finisar (NASDAQ: FNSR) within the next couple of months.

Visualization of motherboard with a city skyline on a chip, along with II-VI branding.

Image source: II-VI.

II-VI finds pathways toward expansion

II-VI's fiscal third-quarter results were mixed in some investors' eyes, even though they signaled continued strong growth. Sales of $342.4 million had climbed 16% from year-ago levels, outpacing slightly the growth rate that most of those following the stock were expecting. Adjusted net earnings grew at an even faster 32% pace to $40.6 million, although the resulting adjusted earnings of $0.62 per share fell short of the consensus forecast among investors for $0.65 per share.

Fundamentally, II-VI revealed positives and negatives. On the plus side, the laser maker kept seeing strong demand for its products from its customers. The book-to-bill ratio for the quarter came in at 1.05, pushing backlog levels to record levels once again. However, the company saw margin weakness during the period, with overall adjusted operating margin falling almost a percentage point and a half to 10.3%.

II-VI's segments showed sources of strength and weakness as well. As we saw last quarter, photonics did the best of the company's units, with a book-to-bill ratio of 1.17 and sales growth of 36%. Operating income for the unit was higher by nearly half from year-ago levels. However, the other two major segments had weaker performance. Performance products managed a 15% rise in segment sales, but the unit's operating income eased lower by about 6%. The laser solutions unit performed the worst, with a 7% sales slide that cut operating income nearly in half and a book-to-bill ratio of just 0.84.

CEO Chuck Mattera seemed satisfied with II-VI's performance. "Growth was widespread in the quarter," Mattera said, "across both our core and growth markets. In our core markets, we saw the leading edge of the global deployment of 5G accelerate and drive strong demand for our products." The CEO specifically called out the reconfigurable optical add-drop multiplexer market as a source of success for II-VI, along with extreme ultraviolet lasers and 3-D sensing products.

Acquisitions made and coming

II-VI also called out acquisitions to help power growth. Mattera pointed to the purchase of defense specialist Redstone Aerospace as giving the company particular expertise in the fast-growing high-energy laser market. Even more importantly, II-VI said that it's worked hard to plan for the full integration of Finisar once the deal gets final approval. With an expectation that China will sign off on the acquisition by mid-2019, II-VI thinks it won't have to wait too long to execute on its post-merger strategies.

However, II-VI's financial guidance for the fiscal fourth quarter was a bit on the light side. The laser maker now expects adjusted earnings of $0.63 to $0.71 per share for the period, with revenue coming in between $343 million and $353 million. Both figures are weaker than the consensus forecasts among investors, although not to such an extent that they raise big worries.

Likely because of the slightly discouraging outlook, II-VI shareholders seemed not entirely satisfied with the report, and the stock eased lower by 1% in premarket trading following the announcement. Nevertheless, as the importance of lasers to the industrial economy keeps growing, II-VI has put itself in position to grow with it as a leader in the field.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends II-VI. The Motley Fool has a disclosure policy.