For a long time now, investors in laser manufacturer II-VI (NASDAQ:IIVI) have waited for the company to execute on its turnaround strategy. Yet quarter after quarter, investors have had to be patient as it appeared that it would take longer than expected for II-VI to get back on its growth trajectory. After its release of fiscal second-quarter results Tuesday morning, though, II-VI has shareholders excited once again about the company's prospects for 2015 and beyond. Let's take a closer look at what's happening at II-VI and why investors are celebrating the latest news from the laser-maker.
II-VI focuses on growth
II-VI's headline numbers were cause enough for excitement, as the company saw impressive gains from year-ago results. Revenue climbed 3% to $176.8 million, matching what investors had expected to see. Yet what truly came as a surprise was II-VI's bottom-line success, with net earnings almost tripling from the previous year's fiscal second quarter. Although a substantial portion of those gains came from a one-time settlement, adjusted earnings per share still climbed 50% to $0.24, beating the consensus estimate by more than 40%.
Margin expansion was the name of the game for II-VI during the quarter. Gross margins climbed 4.6 percentage points to 35.7%, and operating margins showed even greater relatively improvement, jumping 3.7 percentage points to 9.3%.
Looking at II-VI's segments, the Laser Solutions business continues to be the driver of almost all of the company's profits. Sales in the segment grew 6.3%, and the $12.2 million of operating income from Laser Solutions represented almost three-quarters of II-VI's total. Photonics revenues climbed at a nearly 11% pace, but the segment was only marginally profitable on an operating basis. II-VI's Performance Products business was the only one of the three segments that saw revenue decline, with a sales drop of about 9% leading to a 38% drop in operating income.
CEO Francis Kramer touted his company's success, saying, "Our results in the second quarter reflect our continued success delivering innovative products across our markets, in particular to our industrial customers." In addition, Kramer recognized the efforts II-VI has made to boost profits, noting that "[w]e have focused on improving our margins through increased discipline in operations and product rationalization."
What's next for II-VI?
II-VI's leaders believe that the company has even further to go in improving its future results. In particular, margins will remain important, with Kramer saying that he and his team "expect to deliver 250 basis points of improvement in the gross margin, EBITDA margin, and operating margin for fiscal year 2015 as a whole."
Moreover, II-VI has been willing to put its money where its mouth is through targeted share buybacks. The company repurchased more than half a million shares for about $6.2 million during the quarter, which was a slightly faster pace than it saw in the previous quarter.
Perhaps the most encouraging news is II-VI's growth in bookings and backlog. Bookings grew at a faster pace than revenue, with gains of more than 11%. Backlog reached record levels of $228 million. With its book-to-bill of 1.06 back above parity, II-VI appears to be in position to expand its business over the next 12 months.
It will be interesting to see what further effect the company's internal restructuring will have in helping II-VI achieve its goals of maximizing efficiency. Back in July, II-VI consolidated its five former reporting segments into three, integrating portions of its former Infrared Optics, Near-Infrared Optics, and Active Optical Products segments into Laser Solutions and Photonics while leaving the Military & Materials and Advanced Products Group segments for the new Performance Products group.
Investors were clearly pleased with II-VI's results, sending shares up 10% in the first hour of trading after the announcement. Those gains represent just a tiny bounce from the losses shareholders have endured over the past four years, but they could nevertheless reflect light at the end of the tunnel for long-suffering long-term investors in the laser company.