10-Q 1 iivi-10q_20140930.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 September 30, 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 November 4, 2014, 61,183,735 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 – September 30, 2014 and June 30, 2014 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Earnings – Three months ended September 30, 2014 and 2013 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Three months ended September 30, 2014 and 2013 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Three months ended September 30, 2014 and 2013 (Unaudited)

6

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity – Three months ended September 30, 2014 (Unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

27

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 2.

Issuer Purchases of Equity Securities

28

 

 

 

Item 6.

Exhibits

28

 

 

2

 


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)

 

 

 

September 30,

 

 

June 30,

 

 

 

2014

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

145,415

 

 

$

174,660

 

Accounts receivable - less allowance for doubtful accounts of $1,740 at September 30, 2014 and $1,852 at June 30, 2014

 

 

162,341

 

 

 

136,723

 

Inventories

 

 

163,421

 

 

 

165,873

 

Deferred income taxes

 

 

11,482

 

 

 

11,118

 

Prepaid and refundable income taxes

 

 

5,607

 

 

 

4,440

 

Prepaid and other current assets

 

 

14,664

 

 

 

12,917

 

Total Current Assets

 

 

502,930

 

 

 

505,731

 

Property, plant & equipment, net

 

 

207,303

 

 

 

208,939

 

Goodwill

 

 

196,023

 

 

 

196,145

 

Other intangible assets, net

 

 

133,405

 

 

 

136,404

 

Investment

 

 

11,857

 

 

 

11,589

 

Deferred income taxes

 

 

1,321

 

 

 

4,038

 

Other assets

 

 

9,246

 

 

 

9,080

 

Total Assets

 

$

1,062,085

 

 

$

1,071,926

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20,000

 

 

$

20,000

 

Accounts payable

 

 

48,017

 

 

 

45,767

 

Accrued compensation and benefits

 

 

27,035

 

 

 

32,461

 

Accrued income taxes payable

 

 

5,581

 

 

 

4,584

 

Deferred income taxes

 

 

759

 

 

 

732

 

Other accrued liabilities

 

 

33,824

 

 

 

31,521

 

Total Current Liabilities

 

 

135,216

 

 

 

135,065

 

Long-term debt

 

 

216,733

 

 

 

221,960

 

Deferred income taxes

 

 

7,017

 

 

 

7,440

 

Other liabilities

 

 

21,278

 

 

 

32,418

 

Total Liabilities

 

 

380,244

 

 

 

396,883

 

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 - 71,420,203 shares at September 30, 2014; 70,935,098 shares at June 30, 2014

 

 

219,450

 

 

 

213,573

 

Accumulated other comprehensive income

 

 

16,427

 

 

 

19,406

 

Retained earnings

 

 

533,629

 

 

 

521,327

 

 

 

 

769,506

 

 

 

754,306

 

Treasury stock, at cost, 10,105,847 shares at September 30, 2014 and 9,481,963 shares at June 30, 2014

 

 

(87,665

)

 

 

(79,263

)

Total Shareholders' Equity

 

 

681,841

 

 

 

675,043

 

Total Liabilities and Shareholders' Equity

 

$

1,062,085

 

 

$

1,071,926

 

- 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

 

 

 

September 30,

 

 

 

2014

 

 

2013

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

61,981

 

 

$

63,690

 

International

 

 

123,852

 

 

 

86,330

 

Total Revenues

 

 

185,833

 

 

 

150,020

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

117,974

 

 

 

93,709

 

Internal research and development

 

 

12,943

 

 

 

7,747

 

Selling, general and administrative

 

 

35,520

 

 

 

35,093

 

Interest expense

 

 

1,204

 

 

 

483

 

Other expense (income), net

 

 

1,682

 

 

 

53

 

Total Costs, Expenses and Other Expense (Income)

 

 

169,323

 

 

 

137,085

 

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations Before Income Taxes

 

 

16,510

 

 

 

12,935

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

4,208

 

 

 

3,243

 

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations

 

 

12,302

 

 

 

9,692

 

 

 

 

 

 

 

 

 

 

Earnings from Discontinued Operation, net of income tax

 

 

-

 

 

 

2

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

12,302

 

 

$

9,694

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.20

 

 

$

0.16

 

Discontinued Operation

 

$

-

 

 

$

-

 

Consolidated

 

$

0.20

 

 

$

0.16

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.20

 

 

$

0.15

 

Discontinued Operation

 

$

-

 

 

$

-

 

Consolidated

 

$

0.20

 

 

$

0.15

 

- See notes to condensed consolidated financial statements.

 

 

 

 

4

 


 

II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

($000)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

12,302

 

 

$

9,694

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(2,675

)

 

 

2,215

 

Pension adjustment, net of taxes of $57

 

 

(304

)

 

 

-

 

Comprehensive income

 

$

9,323

 

 

$

11,909

 

- See notes to condensed consolidated financial statements.

 

5

 


 

II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

($000)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2014

 

 

2013

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net earnings

 

$

12,302

 

 

$

9,694

 

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

 

 

 

 

 

 

 

 

Earnings from discontinued operation, net of tax

 

 

-

 

 

 

(2

)

Depreciation

 

 

10,511

 

 

 

9,628

 

Amortization

 

 

3,050

 

 

 

2,208

 

Share-based compensation expense

 

 

3,594

 

 

 

4,050

 

Loss on foreign currency remeasurements and transactions

 

 

2,181

 

 

 

922

 

Earnings from equity investment

 

 

(267

)

 

 

(257

)

Deferred income taxes

 

 

1,979

 

 

 

(502

)

Increase (decrease) in cash from changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(30,686

)

 

 

4,875

 

Inventories

 

 

(672

)

 

 

1,405

 

Accounts payable

 

 

2,975

 

 

 

1,559

 

Income taxes

 

 

159

 

 

 

(3,583

)

Other operating net assets

 

 

(4,270

)

 

 

(5,883

)

Net cash provided by operating activities:

 

 

 

 

 

 

 

 

Continuing Operations

 

 

856

 

 

 

24,114

 

Discontinued Operation

 

 

-

 

 

 

273

 

Net cash provided by operating activities

 

 

856

 

 

 

24,387

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant & equipment

 

 

(21,530

)

 

 

(6,573

)

Payment of option to acquire business

 

 

-

 

 

 

(5,000

)

Purchases of business, net of cash acquired

 

 

-

 

 

 

(90,601

)

Net cash used in investing activities:

 

 

 

 

 

 

 

 

Continuing Operations

 

 

(21,530

)

 

 

(102,174

)

Discontinued Operation

 

 

-

 

 

 

-

 

Net cash used in investing activities

 

 

(21,530

)

 

 

(102,174

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

-

 

 

 

103,000

 

Payments on borrowings

 

 

(5,000

)

 

 

(6,000

)

Proceeds from exercises of stock options

 

 

1,504

 

 

 

2,498

 

Purchases of treasury stock

 

 

(5,093

)

 

 

-

 

Payment on earnout arrangement

 

 

-

 

 

 

(2,200

)

Payments of redeemable noncontrolling interest

 

 

-

 

 

 

(8,789

)

Other financing activities

 

 

(1,248

)

 

 

(1,307

)

Net cash provided by financing activities

 

 

(9,837

)

 

 

87,202

 

Effect of exchange rate changes on cash and cash equivalents

 

 

1,266

 

 

 

359

 

Net increase (decrease) in cash and cash equivalents

 

 

(29,245

)

 

 

9,774

 

Cash and Cash Equivalents at Beginning of Period

 

 

174,660

 

 

 

185,433

 

Cash and Cash Equivalents at End of Period

 

$

145,415

 

 

$

195,207

 

Cash paid for interest

 

$

1,169

 

 

$

514

 

Cash paid for income taxes

 

$

4,440

 

 

$

5,092

 

 

 

 

 

 

 

 

 

 

Non cash transactions:

 

 

 

 

 

 

 

 

Purchases of treasury stock recorded in other accrued liabilities

 

$

1,200

 

 

$

-

 

Purchase of business - holdback amount recorded in other accrued liabilities

 

$

-

 

 

$

2,000

 

Purchase of business utilizing earnout arrangement recorded in other liabilities

 

$

-

 

 

$

6,000

 

- See notes to condensed consolidated financial statements.


6

 


 

 

 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, 2014

 

 

70,935

 

 

$

213,573

 

 

$

19,406

 

 

$

521,327

 

 

 

(9,482

)

 

$

(79,263

)

 

$

675,043

 

Shares issued under share-based compensation plans

 

 

413

 

 

 

1,504

 

 

 

-

 

 

 

-

 

 

 

(71

)

 

 

(1,093

)

 

 

411

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12,302

 

 

 

-

 

 

 

-

 

 

 

12,302

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(481

)

 

 

(6,291

)

 

 

(6,291

)

Treasury stock under deferred compensation arrangements

 

 

72

 

 

 

1,018

 

 

 

-

 

 

 

-

 

 

 

(72

)

 

 

(1,018

)

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

(2,675

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,675

)

Share-based compensation expense

 

 

-

 

 

 

3,594

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,594

 

Pension other comprehensive income, net of taxes of $57

 

 

-

 

 

 

-

 

 

 

(304

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(304

)

Excess tax benefit (deficiency) from share-based compensation expense

 

 

-

 

 

 

(239

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(239

)

Balance - September 30, 2014

 

 

71,420

 

 

$

219,450

 

 

$

16,427

 

 

$

533,629

 

 

 

(10,106

)

 

$

(87,665

)

 

$

681,841

 

- See notes to condensed consolidated financial statements.

 

 

 

7

 


 

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 months ended September 30, 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, 2014. The consolidated results of operations for the three months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full fiscal year. The June 30, 2014 Condensed Consolidated Balance Sheet information was derived from the Company’s audited financial statements.

Effective July 1, 2014, the Company realigned its organizational structure into three reporting segments for the purpose of making operational decisions and assessing financial performance: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance Products. The Company is reporting financial information (revenue through operating income) for these new reporting segments in this Quarterly Report on Form 10-Q, which management believes will provide enhanced visibility and transparency into the operations, business drivers and the value of the enterprise.

 

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 previously was serviced by Pacific Rare Specialty Metals & Chemicals, Inc. (“PRM”) and was included as part of the Performance Products segment.  Prior periods have been restated to present this product line on a discontinued operation basis.   The revenues and earnings of the tellurium product line have been reflected as a discontinued operation for the periods presented as follows: ($000):

 

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2014

 

 

2013

 

Revenues

 

$

-

 

 

$

1,152

 

Earnings from discontinued operation before income taxes

 

 

-

 

 

 

2

 

Income tax benefit (expense)

 

 

-

 

 

 

-

 

Earnings from discontinued operation, net of taxes

 

$

-

 

 

$

2

 

 

 

Note  3.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that supersedes virtually all existing revenue recognition guidance under GAAP. The update's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016 and prohibits early adoption. The update allows for the use of either the retrospective or modified retrospective approach of adoption. Management currently is evaluating the available transition methods and the potential impact of adoption on the Company's consolidated financial statements.

 

In April 2014, FASB issued an 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.

8

 


 

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 was effective for fiscal years beginning after December 15, 2013 and is effective for the Company for the fiscal quarter ended September 30, 2014. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements.

 

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 was effective for fiscal years beginning after December 15, 2013 and is effective for the Company for the fiscal quarter ended September 30, 2014. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements.

 

 

Note  4.

Investment

The Company has an equity investment of 20.2% in Guangdong Fuxin Electronic Technology (“Fuxin”) based in Guangdong Province, China, which is accounted for under the equity method of accounting. The total carrying value of the investment recorded at September 30, 2014 and June 30, 2014 was $11.9 million and $11.6 million, respectively. During each of the three months ended September 30, 2014 and 2013, the Company’s pro-rata share of earnings from this investment was $0.3 million and was recorded in Other expense (income), net in the Condensed Consolidated Statements of Earnings.

 

Note   5.

Inventories

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

 

 

 

 

September 30,

 

 

June 30,

 

 

 

2014

 

 

2014

 

Raw materials

 

$

73,867

 

 

$

71,949

 

Work in progress

 

 

47,076

 

 

 

44,739

 

Finished goods

 

 

42,478

 

 

 

49,185

 

 

 

$

163,421

 

 

$

165,873

 

 

9

 


 

Note  6.

Property, Plant and Equipment

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

 

 

 

September 30,

 

 

June 30,

 

 

 

2014

 

 

2014

 

Land and land improvements

 

$

2,416

 

 

$

2,381

 

Buildings and improvements

 

 

97,236

 

 

 

96,551

 

Machinery and equipment

 

 

339,994

 

 

 

335,408

 

Construction in progress

 

 

19,269

 

 

 

16,990

 

 

 

 

458,915

 

 

 

451,330

 

Less accumulated depreciation

 

 

(251,612

)

 

 

(242,391

)

 

 

$

207,303

 

 

$

208,939

 

 

Note  7.

Goodwill and Other Intangible Assets

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

 

 

 

 

Three Months Ended September 30, 2014

 

 

 

II-VI Laser

 

 

II-VI

 

 

II- VI Performance

 

 

 

 

 

 

 

Solutions

 

 

Photonics

 

 

Products

 

 

Total

 

Balance-beginning of period

 

$

44,041

 

 

$

99,214

 

 

$

52,890

 

 

$

196,145

 

Foreign currency translation

 

 

(122

)

 

 

-

 

 

 

-

 

 

 

(122

)

Balance-end of period

 

$

43,919

 

 

$

99,214

 

 

$

52,890

 

 

$

196,023

 

 

The Company reviews the recoverability of goodwill at least annually and any time business conditions indicate a potential change in recoverability. The Company may use combination of a discounted cash flow model (“DCF model”) and a market analysis to determine the current fair value of its reporting units. A number of significant assumptions and estimates are involved in estimating the forecasted cash flows used in the DCF model, including markets and market shares, sales volume and pricing, costs to produce, working capital changes and income tax rates. Management considers historical experience and all available information at the time the fair values of the reporting units are estimated. However, actual fair values that could be realized could differ from those used to evaluate the impairment of goodwill.

 

As a result of the July 1, 2014 segment realignment, the Company reviewed the recoverability of the carrying value of goodwill at its reporting units.  The Company has the option to perform a qualitative assessment of goodwill prior to completing the quantitative test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets.  Due to the short duration of time since the Company’s most recent annual quantitative goodwill impairment test, which was completed on April 1, 2014, the Company elected to perform a qualitative test on its reporting units as part of the segment realignment.  The Company did not record any impairment of goodwill or long-lived assets during the three months ended September 30, 2014, as the qualitative assessment did not indicate deterioration in the fair value of its reporting units since the most recent annual impairment test.

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of September 30, 2014 and June 30, 2014 was as follows ($000):

 

 

 

September 30, 2014

 

 

June 30, 2014

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

50,505

 

 

$

(15,569

)

 

$

34,936

 

 

$

50,505

 

 

$

(14,474

)

 

$

36,031

 

Trademarks

 

 

17,870

 

 

 

(1,055

)

 

 

16,815

 

 

 

17,870

 

 

 

(1,037

)

 

 

16,833

 

Customer Lists

 

 

102,665

 

 

 

(21,152

)

 

 

81,513

 

 

 

102,839

 

 

 

(19,448

)

 

 

83,391

 

Other

 

 

1,580

 

 

 

(1,439

)

 

 

141

 

 

 

1,586

 

 

 

(1,437

)

 

 

149

 

Total

 

$

172,620

 

 

$

(39,215

)

 

$

133,405

 

 

$

172,800

 

 

$

(36,396

)

 

$

136,404

 

 

10

 


 

Amortization expense recorded on the Company’s intangible assets was $3.1 million and $2.2 million for the three months ended September 30, 2014 and 2013, respectively.  The technology and patents are being amortized over a range of 60 to 240 months, with a weighted average remaining life of approximately 115 months. The customer lists are being amortized over a range of approximately 120 months to 240 months with a weighted average remaining life of approximately 148 months. The gross carrying amount of trademarks includes $16.4 million of acquired trade names with indefinite lives that are not amortized but tested annually for impairment or more frequently if a triggering event occurs. Included in the gross carrying amount and accumulated amortization of the Company’s intangible assets is the effect of foreign currency translation on that portion of the intangible assets relating to the Company’s German subsidiaries, as well as Photop Technologies, Inc. (“Photop”) and Photop AOFR Pty. Ltd. (“Photop AOFR”).

 

At September 30, 2014, the estimated amortization expense for existing intangible assets for each of the five succeeding fiscal years is as follows ($000):

 

 

Year Ending June 30,

 

 

 

 

 

 

Remaining 2015

 

 

 

$

8,764

 

2016

 

 

 

 

11,619

 

2017

 

 

 

 

11,609

 

2018

 

 

 

 

11,140

 

2019

 

 

 

 

10,715

 

 

 

 

Note  8.

Debt

The components of debt for the periods indicated were as follows ($000):

 

 

 

September 30,

 

 

June 30,

 

 

2014

 

 

2014

 

Line of credit, interest at LIBOR, as defined, plus 1.50% and 1.25%, respectively

$

154,000

 

 

$

154,000

 

Term loan, interest at LIBOR, as defined, plus 1.25%

 

80,000

 

 

 

85,000

 

Yen denominated line of credit, interest at LIBOR, as defined, plus 0.625%

 

2,733

 

 

 

2,960

 

Total debt

 

236,733

 

 

 

241,960

 

Current portion of long-term debt

 

(20,000

)

 

 

(20,000

)

Long-term debt, less current portion

$

216,733

 

 

$

221,960

 

 

The Company’s current First Amended and Restated Credit Agreement (the “Credit Facility”) provides for a revolving credit facility of $225 million, as well as a $100 million Term Loan. The Term Loan is being re-paid in consecutive quarterly principal payments on the first business day of each January, April, July and October, with the first payment having commenced on October 1, 2013, as follows: (i) twenty consecutive quarterly installments of $5 million and (ii) a final installment of all remaining principal due and payable on the maturity date. The Credit Facility is unsecured, but is guaranteed by each existing and subsequently acquired or organized wholly-owned domestic subsidiary of the Company. The Company has the option to request an increase to the size of the Credit Facility in an aggregate additional amount not to exceed $100 million. The Credit Facility has a five-year term through September 2018 and has an interest rate of LIBOR, as defined in the agreement, plus 0.75% to 1.75% based on the Company’s ratio of consolidated indebtedness to consolidated EBITDA. Additionally, the facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of September 30, 2014, the Company was in compliance with all financial covenants under its Credit Facility.

 

The Company’s Yen denominated line of credit is a 500 million Yen facility that has a five-year term through June 2016 and has an interest rate equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.50%. At September 30, 2014 and June 30, 2014, the Company had 300 million Yen borrowed. Additionally, the facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of September 30, 2014, the Company was in compliance with all financial covenants under its Yen facility.

11

 


 

 

The Company had aggregate availability of $71.0 million under its lines of credit as of September 30, 2014 and June 30, 2014. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of September 30, 2014 and June 30, 2014, total outstanding letters of credit supported by the credit facilities were $1.9 million.

 

The weighted average interest rate of total borrowings was 1.93% and 1.49% for the three months ended September 30, 2014 and 2013, respectively.

 

Remaining annual principal payments under the Company’s existing credit facilities as of September 30, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar

 

 

 

 

 

 

 

Term

 

 

Yen Line

 

 

Line of

 

 

 

 

 

Period

 

Loan

 

 

of Credit

 

 

Credit

 

 

Total

 

Year 1

 

$

20,000

 

 

$

-

 

 

$

-

 

 

$

20,000

 

Year 2

 

 

20,000

 

 

 

2,733

 

 

 

-

 

 

 

22,733

 

Year 3

 

 

20,000

 

 

 

-

 

 

 

-

 

 

 

20,000

 

Year 4

 

 

20,000

 

 

 

-

 

 

 

154,000

 

 

 

174,000

 

Year 5

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

80,000

 

 

$

2,733

 

 

$

154,000

 

 

$

236,733

 

 

 

Note  9.

Income Taxes

The Company’s year-to-date effective income tax rate at September 30, 2014 and 2013 was 25.5% and 25.1%, respectively. The variations between the Company’s effective tax rate from continuing operations and the U.S. statutory rate of 35.0% were primarily due to the consolidation of the Company’s foreign operations, which are subject to income taxes at lower statutory rates.  

U.S. GAAP clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of September 30, 2014 and June 30, 2014, the Company’s gross unrecognized income tax benefit was $3.0 million and $2.8 million, respectively. The Company has classified the uncertain tax positions as noncurrent income tax liabilities, as the amounts are not expected to be paid within one year. If recognized, substantially all of the gross unrecognized tax benefits at September 30, 2014 would impact the effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions in the income tax provision on the Condensed Consolidated Statements of Earnings. The amount of accrued interest and penalties included in the $3.0 million and $2.8 million of gross unrecognized income tax benefit at September 30, 2014 and June 30, 2014 was immaterial. Fiscal years 2011 to 2014 remain open to examination by the United States Internal Revenue Service, fiscal years 2007 to 2014 remain open to examination by certain state jurisdictions, and fiscal years 2007 to 2014 remain open to examination by certain foreign taxing jurisdictions.

 

12

 


 

Note  10.

Earnings Per Share

The following table sets forth the computation of earnings per share attributable to II-VI Incorporated for the periods indicated. Weighted average shares issuable upon the exercises of stock options and the release of performance and restricted shares that were not included in the calculation because they were anti-dilutive were approximately 877,000 and 304,000 for the three months ended September 30, 2014 and 2013, respectively ($000 except per share data):

 

 

 

 

Three Months Ended

 

 

September 30,

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

$

12,302

 

 

$

9,692

 

Earnings from discontinued operation

 

-

 

 

 

2

 

Net earnings

$

12,302

 

 

$

9,694

 

Divided by:

 

 

 

 

 

 

 

Weighted average shares

 

61,508

 

 

 

62,379

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

Continuing operations

$

0.20

 

 

$

0.16

 

Discontinued operation

$

-

 

 

$

-

 

Consolidated

$

0.20

 

 

$

0.16

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

$

12,302

 

 

$

9,692

 

Earnings from discontinued operation

 

-

 

 

 

2

 

Net earnings

$

12,302

 

 

$

9,694

 

Divided by: