10-Q 1 iivi-10q_20140331.htm 10-Q

that 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2014

¨

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: 0-16195

 

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

 

Saxonburg, PA

16056

(Address of principal executive offices)

(Zip Code)

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)

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

Large accelerated filer

x

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨  

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At May 2, 2014, 61,939,724 shares of Common Stock, no par value, of the registrant were outstanding.

 

 


II-VI INCORPORATED

INDEX

 

 

 

Page No.

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Condensed Consolidated Balance Sheets – March 31, 2014 and June 30, 2013 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Earnings – Three and nine months ended March 31, 2014 and 2013 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Three and nine months ended March 31, 2014 and 2013 (Unaudited)

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Nine months ended March 31, 2014 and 2013 (Unaudited)

7

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity – Nine months ended March 31, 2014 (Unaudited)

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.

Controls and Procedures

35

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 2.

Issuer Purchases of Equity Securities

36

 

 

 

Item 6.

Exhibits

36

 

 

2


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)

 

 

March 31,

 

 

June 30,

 

 

2014

 

 

2013

 

Assets

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

185,691

 

 

$

185,433

 

Accounts receivable - less allowance for doubtful accounts of $1,147 at March 31, 2014 and $1,479 at June 30, 2013

 

126,228

 

 

 

107,173

 

Inventories

 

174,607

 

 

 

141,859

 

Deferred income taxes

 

9,192

 

 

 

10,794

 

Prepaid and refundable income taxes

 

4,456

 

 

 

4,543

 

Prepaid and other current assets

 

15,535

 

 

 

11,342

 

Total Current Assets

 

515,709

 

 

 

461,144

 

Property, plant & equipment, net

 

211,733

 

 

 

170,672

 

Goodwill

 

198,864

 

 

 

123,352

 

Other intangible assets, net

 

141,263

 

 

 

86,701

 

Investment

 

11,409

 

 

 

11,203

 

Deferred income taxes

 

1,995

 

 

 

2,696

 

Other assets

 

9,091

 

 

 

8,034

 

Total Assets

$

1,090,064

 

 

$

863,802

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Current portion of long-term debt

$

20,000

 

 

$

-

 

Accounts payable

 

47,885

 

 

 

23,617

 

Accrued compensation and benefits

 

29,789

 

 

 

28,315

 

Accrued income taxes payable

 

2,741

 

 

 

7,697

 

Deferred income taxes

 

147

 

 

 

110

 

Other accrued liabilities

 

34,527

 

 

 

34,695

 

Total Current Liabilities

 

135,089

 

 

 

94,434

 

Long-term debt

 

242,907

 

 

 

114,036

 

Deferred income taxes

 

10,790

 

 

 

4,095

 

Other liabilities

 

36,037

 

 

 

15,129

 

Total Liabilities

 

424,823

 

 

 

227,694

 

Shareholders' Equity

 

 

 

 

 

 

 

Preferred stock, no par value; authorized - 5,000,000 shares; none issued

 

-

 

 

-

 

Common stock, no par value; authorized - 300,000,000 shares; issued - 70,827,878 shares at March 31, 2014; 70,223,286 shares at June 30, 2013

 

209,970

 

 

 

194,284

 

Accumulated other comprehensive income

 

17,850

 

 

 

15,600

 

Retained earnings

 

508,672

 

 

 

482,878

 

 

 

736,492

 

 

 

692,762

 

Treasury stock, at cost, 8,896,984 shares at March 31, 2014 and 8,011,733 shares at June 30, 2013

 

(71,251

)

 

 

(56,654

)

Total Shareholders' Equity

 

665,241

 

 

 

636,108

 

Total Liabilities and Shareholders' Equity

$

1,090,064

 

 

$

863,802

 

 

- 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,

 

 

2014

 

 

2013

 

Revenues

 

 

 

 

 

 

 

Domestic

$

54,424

 

 

$

65,176

 

International

 

119,131

 

 

 

78,764

 

Total Revenues

 

173,555

 

 

 

143,940

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

Cost of goods sold

 

118,865

 

 

 

92,986

 

Internal research and development

 

12,099

 

 

 

5,781

 

Selling, general and administrative

 

33,848

 

 

 

27,004

 

Interest expense

 

1,412

 

 

 

449

 

Other expense (income), net

 

(1,694

)

 

 

(1,401

)

Total Costs, Expenses and Other Expense (Income)

 

164,530

 

 

 

124,819

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations Before Income Taxes

 

9,025

 

 

 

19,121

 

 

 

 

 

 

 

 

 

Income Taxes

 

494

 

 

 

2,861

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations

 

8,531

 

 

 

16,260

 

 

 

 

 

 

 

 

 

Loss from Discontinued Operation, net of income tax

 

-

 

 

 

(166

)

 

 

 

 

 

 

 

 

Net Earnings

 

8,531

 

 

 

16,094

 

Less:  Net Earnings Attributable to Redeemable Noncontrolling Interest

 

-

 

 

 

225

 

Net Earnings Attributable to II-VI Incorporated

$

8,531

 

 

$

15,869

 

 

 

 

 

 

 

 

 

Earnings (loss) Attributable to II-VI Incorporated: Basic Earnings (loss) Per Share:

 

 

 

 

 

 

 

Continuing Operations

$

0.14

 

 

$

0.26

 

Discontinued Operation

$

-

 

 

$

(0.00

)

Consolidated

$

0.14

 

 

$

0.26

 

 

 

 

 

 

 

 

 

Earnings (loss) Attributable to II-VI Incorporated: Diluted Earnings (loss) Per Share:

 

 

 

 

 

 

 

Continuing Operations

$

0.13

 

 

$

0.25

 

Discontinued Operation

$

-

 

 

$

(0.00

)

Consolidated

$

0.13

 

 

$

0.25

 

- See notes to condensed consolidated financial statements.

 

 

4


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Earnings (Unaudited)

($000 except per share data)

 

 

Nine Months Ended

March 31,

 

 

2014

 

 

2013

 

Revenues

 

 

 

 

 

 

 

Domestic

$

178,683

 

 

$

168,938

 

International

 

316,657

 

 

 

228,107

 

Total Revenues

 

495,340

 

 

 

397,045

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

Cost of goods sold

 

330,945

 

 

 

248,424

 

Internal research and development

 

31,201

 

 

 

16,992

 

Selling, general and administrative

 

101,412

 

 

 

79,534

 

Interest expense

 

3,064

 

 

 

708

 

Other expense (income), net

 

(2,766

)

 

 

(6,713

)

Total Costs, Expenses and Other Expense (Income)

 

463,856

 

 

 

338,945

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations Before Income Taxes

 

31,484

 

 

 

58,100

 

 

 

 

 

 

 

 

 

Income Taxes

 

5,823

 

 

 

13,844

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations

 

25,661

 

 

 

44,256

 

 

 

 

 

 

 

 

 

Earnings (loss) from Discontinued Operation, net of income tax

 

133

 

 

 

(2,563

)

 

 

 

 

 

 

 

 

Net Earnings

$

25,794

 

 

$

41,693

 

Less:  Net Earnings Attributable to Redeemable Noncontrolling Interest

 

-

 

 

 

906

 

Net Earnings Attributable to II-VI Incorporated

$

25,794

 

 

$

40,787

 

 

 

 

 

 

 

 

 

Earnings (loss) Attributable to II-VI Incorporated: Basic Earnings (loss) Per Share:

 

 

 

 

 

 

 

Continuing Operations

$

0.41

 

 

$

0.69

 

Discontinued Operation

$

0.00

 

 

$

(0.04

)

Consolidated

$

0.41

 

 

$

0.65

 

 

 

 

 

 

 

 

 

Earnings (loss) Attributable to II-VI Incorporated: Diluted Earnings (loss) Per Share:

 

 

 

 

 

 

 

Continuing Operations

$

0.40

 

 

$

0.68

 

Discontinued Operation

$

0.00

 

 

$

(0.04

)

Consolidated

$

0.40

 

 

$

0.64

 

- See notes to condensed consolidated financial statements.

 

5


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

($000)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

March 31,

 

 

March 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

$

8,531

 

 

$

16,094

 

 

$

25,794

 

 

$

41,693

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(2,123

)

 

 

(1,622

)

 

 

2,250

 

 

 

1,500

 

Comprehensive income

$

6,408

 

 

$

14,472

 

 

$

28,044

 

 

$

43,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to redeemable noncontrolling interest

$

-

 

 

$

225

 

 

$

-

 

 

$

906

 

Other comprehensive income (loss) attributable to redeemable noncontrolling interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment attributable to redeemable noncontrolling interest

 

-

 

 

 

(138

)

 

 

-

 

 

 

(354

)

Comprehensive income attributable to redeemable noncontrolling interest

$

-

 

 

$

87

 

 

$

-

 

 

$

552

 

Comprehensive income attributable to II-VI Incorporated

$

6,408

 

 

$

14,385

 

 

$

28,044

 

 

$

42,641

 

- 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,

 

 

2014

 

 

2013

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net earnings

$

25,794

 

 

$

41,693

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

(Earnings) loss from discontinued operation, net of tax

 

(133

)

 

 

2,563

 

Depreciation

 

31,191

 

 

 

25,331

 

Amortization

 

8,234

 

 

 

4,561

 

Share-based compensation expense

 

9,732

 

 

 

9,232

 

Loss on foreign currency remeasurements and transactions

 

380

 

 

 

672

 

Earnings from equity investment

 

(517

)

 

 

(822

)

Deferred income taxes

 

(1,814

)

 

 

2,306

 

Excess tax benefits from share-based compensation expense

 

(522

)

 

 

(678

)

Increase (decrease) in cash from changes in:

 

 

 

 

 

 

 

Accounts receivable

 

(17,719

)

 

 

9,306

 

Inventories

 

3,886

 

 

 

(7,387

)

Accounts payable

 

21,943

 

 

 

(7,697

)

Income taxes

 

(7,810

)

 

 

565

 

Other operating net assets

 

(5,237

)

 

 

(11,690

)

Net cash provided by operating activities:

 

 

 

 

 

 

 

Continuing Operations

 

67,408

 

 

 

67,955

 

Discontinued Operation

 

1,197

 

 

 

164

 

Net cash provided by operating activities

 

68,605

 

 

 

68,119

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Additions to property, plant & equipment

 

(20,767

)

 

 

(17,430

)

Purchases of businesses, net of cash acquired

 

(177,676

)

 

 

(126,165

)

Proceeds received on contractual settlement from Thailand flood

 

-

 

 

 

2,436

 

Other investing activities

 

226

 

 

 

1,452

 

Net cash used in investing activities:

 

 

 

 

 

 

 

Continuing Operations

 

(198,217

)

 

 

(139,707

)

Discontinued Operation

 

-

 

 

 

(68

)

Net cash used in investing activities

 

(198,217

)

 

 

(139,775

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Proceeds from borrowings

 

183,000

 

 

 

113,000

 

Payments on borrowings

 

(34,000

)

 

 

(4,000

)

Payment on earnout arrangement

 

(2,200

)

 

 

-

 

Payments of redeemable noncontrolling interest

 

(8,789

)

 

 

(284

)

Proceeds from exercises of stock options

 

3,613

 

 

 

3,836

 

Purchases of treasury stock

 

(10,957

)

 

 

(19,978

)

Other financing activities

 

(1,375

)

 

 

(19

)

Net cash provided by financing activities

 

129,292

 

 

 

92,555

 

Effect of exchange rate changes on cash and cash equivalents

 

578

 

 

 

(249

)

Net increase in cash and cash equivalents

 

258

 

 

 

20,650

 

Cash and Cash Equivalents at Beginning of Period

 

185,433

 

 

 

134,944

 

Cash and Cash Equivalents at End of Period

$

185,691

 

 

$

155,594

 

Cash paid for interest

$

2,883

 

 

$

631

 

Cash paid for income taxes

$

12,545

 

 

$

10,040

 

Non cash transactions:

 

 

 

 

 

 

 

Purchase of business - holdback amount recorded in other accrued liabilities

$

10,000

 

 

$

-

 

Capital lease obligation incurred on facility lease

$

11,857

 

 

$

-

 

Purchase of business utilizing earnout arrangement recorded in other liabilities

$

-

 

 

$

3,400

 

- See notes to condensed consolidated financial statements.

 

 

 

7


 II-VI Incorporated and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

(000)

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Comprehensive

 

 

Retained

 

 

Treasury Stock

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Income

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance-June 30, 2013

 

70,223

 

 

$

194,284

 

 

$

15,600

 

 

$

482,878

 

 

 

(8,012

)

 

$

(56,654

)

 

$

636,108

 

Shares issued under share-based compensation plans

 

605

 

 

 

3,623

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,623

 

Minimum tax withholding requirements

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(42

)

 

 

(799

)

 

 

(799

)

Share-based compensation expense

 

-

 

 

 

9,732

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,732

 

Net earnings

 

-

 

 

 

-

 

 

 

-

 

 

 

25,794

 

 

 

-

 

 

 

-

 

 

 

25,794

 

Purchases of treasury stock

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(750

)

 

 

(11,989

)

 

 

(11,989

)

Treasury stock under deferred compensation arrangements

 

-

 

 

 

1,809

 

 

 

-

 

 

 

-

 

 

 

(93

)

 

 

(1,809

)

 

 

-

 

Excess tax benefits from share-based compensation expense

 

-

 

 

 

522

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

522

 

Foreign currency translation adjustments

 

-

 

 

 

-

 

 

 

2,250

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,250

 

Balance-March 31, 2014

 

70,828

 

 

$

209,970

 

 

$

17,850

 

 

$

508,672

 

 

 

(8,897

)

 

$

(71,251

)

 

$

665,241

 

- See notes to condensed consolidated financial statements.

 

 

 

8


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” or the “Company”) for the three and nine months ended March 31, 2014 and 2013 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 for the fiscal year ended June 30, 2013. The consolidated results of operations for the three and nine months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full fiscal year. The June 30, 2013 Condensed Consolidated Balance Sheet information was derived from the Company’s audited financial statements.

In conjunction with the acquisitions of Oclaro, Inc.’s (“Oclaro”) fiber amplifier and micro-optics business on November 1, 2013, and, Oclaro’s Switzerland-based semiconductor laser business on September 12, 2013, the Company has established a new reporting segment “Active Optical Products” which reports the operating results of these two recently acquired businesses.

Note  2.

Discontinued Operation

During December 2013, the Company completed the discontinuance of its tellurium product line by exiting all business activities associated with this product.  This product line was previously serviced by Pacific Rare Specialty Metals & Chemicals, Inc. (“PRM”) and was included as part of the Military & Materials segment.   Prior periods have been restated to present this product line on a discontinued operation basis.   The revenues and earnings (losses) of the tellurium product line have been reflected as a discontinued operation for the periods presented as follows: ($000):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

March 31,

 

 

March 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

-

 

 

$

1,230

 

 

$

1,849

 

 

$

6,306

 

Earnings (loss) from discontinued operation before income taxes

 

-

 

 

 

(166

)

 

133

 

 

 

(2,563

)

Income tax benefit (expense)

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Earnings (loss) from discontinued operation, net of taxes

$

-

 

 

$

(166

)

 

$

133

 

 

$

(2,563

)

 

Note  3.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (the "FASB") issued an Accounting Standards Update ("ASU") that changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity's operations and financial results. The new standard will be effective for annual periods beginning on or after December 15, 2014 with early adoption permitted and will be effective for the Company beginning in the first quarter of fiscal year 2016. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued an ASU that changes how certain unrecognized tax benefits are to be presented on the consolidated balance sheet. This ASU clarified existing guidance to require that an unrecognized tax benefit or a portion thereof be presented in the consolidated balance sheet as a reduction to a deferred tax asset for a net operating loss ("NOL") carryforward, similar tax loss, or a tax credit carryforward except when an NOL carryforward, similar tax loss, or tax credit carryforward is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. In such a case, the unrecognized tax benefit would be presented in the consolidated balance sheet as a liability. This update is effective prospectively for fiscal years beginning after December 15, 2013 and will be effective for the Company beginning in the first quarter of fiscal year 2015. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements.

 

9


In March 2013, the FASB issued an ASU related to a parent’s accounting for the cumulative translation adjustment upon de-recognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The update clarifies the applicable guidance under current U.S. GAAP for the release of the cumulative translation adjustment upon a reporting entity’s de-recognition of a subsidiary or group of assets within a foreign entity or part or all of its investment in a foreign entity. The update requires a reporting entity, which either sells a part or all of its investment in a foreign entity or ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity, to release any related cumulative translation adjustment into net income. This update is effective prospectively for fiscal years beginning after December 15, 2013 and will be effective for the Company beginning in the first quarter of fiscal year 2015. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In February 2013, the FASB issued an ASU related to disclosure requirements of reclassifications out of accumulated other comprehensive income. The adoption of the guidance requires the Company to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, the Company is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. This update was effective for the Company beginning in the first quarter of fiscal year 2014 and did not have a significant impact on the Company’s consolidated financial statements.

 

Note  4.

Acquisitions

Oclaro’s Fiber Amplifier and Micro-Optics Business

In November 2013, the Company acquired certain assets of Oclaro used in the fiber amplifier and micro-optics business. The Company operates the business under the name Network Solutions and includes it with II-VI Laser Enterprise, GmbH (“Laser Enterprise”) in the Company’s new operating segment, Active Optical Products. Network Solutions is a manufacturer of fiber amplifiers and micro-optics used in the optical communications market. At closing, the Company paid $79.6 million in cash, plus a $4.0 million holdback amount for 14 months to address any post-closing adjustments or claims, and $5.0 million that was previously paid to Oclaro on September 12, 2013. The purchase price of the Network Solutions acquisition is summarized as follows ($000):

 

 

Net cash paid at acquisition date

$

79,600

 

Cash previously paid

 

5,000

 

Holdback amount recorded in Other liabilities

 

4,000

 

Purchase price

$

88,600

 

 

Due to the timing of the acquisition, the Company is still in the process of completing its fair market valuation, including the valuation of certain tangible and intangible assets as well as deferred income taxes. The following table presents the preliminary allocation of the purchase price of the assets acquired at the date of acquisition, as the Company intends to finalize its accounting for the acquisition of Network Solutions during fiscal year 2014 ($000):

 

Assets

 

 

 

Inventories

$

11,314

 

Property, plant & equipment

 

9,700

 

Intangible assets

 

32,900

 

Goodwill

 

34,686

 

Total assets acquired

$

88,600

 

 

 

The goodwill of $34.7 million is included in the Active Optical Products segment and is attributed to the expected synergies and the assembled workforce of Network Solutions. All of the goodwill is deductible for income tax purposes.

The amount of revenues and net loss from operations of Network Solutions included in the Company’s Condensed Consolidated Statement of Earnings were $19.4 million and $0.5 million, respectively, for the three months ended March 31, 2014 and were $32.6 million and $2.3 million, respectively, for the nine months ended March 31, 2014.

 

Oclaro’s Switzerland-Based Semiconductor Laser Business

In September 2013, the Company acquired all of the outstanding shares of Oclaro Switzerland GmbH, a limited liability company formed under the laws of the Swiss confederation, as well as certain additional assets of Oclaro used in the semiconductor laser

10


business. The Company operates the acquired business under the name Laser Enterprise and includes it in the Company’s new operating segment, Active Optical Products. Laser Enterprise is a manufacturer of high-power semiconductor laser components enabling fiber and direct diode laser systems for material processing, medical, consumer and printing applications. In addition, the segment manufactures pump lasers for optical amplifiers for both terrestrial and submarine applications and vertical cavity surface emitting lasers (VCSELS) for optical navigation, optical interconnects and optical sensing applications.  At closing, the Company paid $90.6 million of cash, net of cash acquired of $1.7 million, a $6.0 million holdback amount by the Company for 15 months to address any post-closing adjustments or claims, and a $2.0 million holdback amount for potential post-closing working capital adjustments.  During the three months ended March 2014, the Company paid an additional $2.5 million for a working capital adjustment in accordance with the purchase agreement. The purchase price of the Laser Enterprise acquisition is summarized as follows ($000):

 

 

Net cash paid at acquisition date

$

90,601

 

Additional cash paid for working capital adjustment

 

2,475

 

Holdback amount recorded in Other accrued liabilities

 

6,000

 

Purchase price

$

99,076

 

 

Due to the timing of the acquisition, the Company is still in the process of completing its fair market valuation, including the valuation of certain tangible and intangible assets as well as deferred income taxes. The following table presents the preliminary allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition, as the Company intends to finalize its accounting for the acquisition of Laser Enterprise during fiscal year 2014 ($000):

 

Assets

 

 

 

Inventories

$

26,071

 

Prepaid and other assets

 

1,035

 

Deferred income taxes

 

2,376

 

Property, plant & equipment

 

30,200

 

Intangible assets

 

29,800

 

Goodwill

 

41,105

 

Total assets acquired

$

130,587

 

 

 

 

 

Liabilities

 

 

 

Accounts payable

$

2,214

 

Deferred income taxes

 

13,290

 

Accrued income taxes

 

2,714

 

Other accrued liabilities

 

13,293

 

Total liabilities assumed

$

31,511

 

Net assets acquired

$

99,076

 

 

 

The goodwill of Laser Enterprise of $41.1 million is included in the Active Optical Products segment and is attributed to the expected synergies and the assembled workforce of Laser Enterprise. None of the goodwill is deductible for income tax purposes.

The amount of revenues and net loss from operations of Laser Enterprise included in the Company’s Condensed Consolidated Statement of Earnings for the three months ended March 31, 2014 was $18.1 million and $5.0 million, respectively, and was $43.1 million and $12.3 million, respectively, for the nine months ended March 31, 2014.

In conjunction with the acquisitions of Network Solutions and Laser Enterprise, the Company expensed transactions costs of approximately $3.7 million, net of tax of $0.2 million, during the nine months ended March 31, 2014.  None of these costs were recorded during the three months ended March 31, 2014.  These costs were recorded within selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings.

Pro Forma Information

The following unaudited pro forma consolidated results of operations for the three and nine months ended March 31, 2014 and 2013 have been prepared as if the acquisitions of Network Solutions and Laser Enterprise had occurred on July 1, 2012, the beginning of the Company’s fiscal year 2013, which is the fiscal year prior to the acquisitions. As a result, certain transaction related expenses of $3.7 million (net of tax) for the nine month period were only included in the earliest period presented below ($000 except per share data).

11


 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

March 31,

 

 

March 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

$

173,555

 

 

$

189,471

 

 

$

546,991

 

 

$

489,527

 

Earnings from continuing operations attributable to II-VI Incorporated

 

8,531

 

 

 

14,166

 

 

 

34,377

 

 

 

31,095

 

Basic earnings per share from continuing operations attributable to II-VI Incorporated

 

0.14

 

 

 

0.23

 

 

 

0.55

 

 

 

0.50

 

Diluted earnings per share from continuing operations attributable to II-VI Incorporated

 

0.13

 

 

 

0.22

 

 

 

0.54

 

 

 

0.49

 

 

The pro forma results are not necessarily indicative of what actually would have occurred if the transactions had occurred as described above, are not intended to be a projection of future results and do not reflect any cost savings that might be achieved from the combined operations.

 

Note  5.

Investment

The Company has an equity investment in Guangdong Fuxin Electronic Technology (“Fuxin”) based in Guangdong Province, China of 20.2%, which is accounted for under the equity method of accounting. The total carrying value of the investment recorded at March 31, 2014 and June 30, 2013 was $11.4 million and $11.2 million, respectively. During the three months ended March 31, 2014 and 2013, the Company’s pro-rata share of earnings from this investment was $0.1 million and $0.2 million, respectively, and was $0.5 million and $0.8 million during the nine months ended March 31, 2014 and 2013, respectively, and were recorded in Other expense (income), net in the Condensed Consolidated Statements of Earnings.

Note  6.

Inventories

The components of inventories were as follows ($000):

 

 

March 31,

 

 

June 30,

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

Raw materials

$

76,254

 

 

$

59,290

 

Work in progress

 

57,344

 

 

 

43,895

 

Finished goods

 

41,009

 

 

 

38,674

 

 

$

174,607

 

 

$

141,859

 

 

Note  7.

Property, Plant and Equipment

Property, plant and equipment consists of the following ($000):

 

March 31,

 

 

June 30,

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

Land and land improvements

$

2,381

 

 

$

2,236

 

Buildings and improvements

 

96,404

 

 

 

87,189

 

Machinery and equipment

 

331,181

 

 

 

276,802

 

Construction in progress

 

14,579

 

 

 

10,831

 

 

 

444,545

 

 

 

377,058

 

Less accumulated depreciation

 

(232,812

)

 

 

(206,386

)

 

$

211,733

 

 

$

170,672

 

12


 

Note  8.

Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill are as follows ($000):

 

 

Nine Months Ended March 31, 2014

 

 

 

 

 

 

Near-

 

 

Military

 

 

Advanced

 

 

Active

 

 

 

 

 

 

Infrared

 

 

Infrared

 

 

&

 

 

Products

 

 

Optical

 

 

 

 

 

 

Optics

 

 

Optics

 

 

Materials

 

 

Group

 

 

Products

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance-beginning of period