10-Q 1 iivi-10q_20141231.htm 10-Q

goothat 

 

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 December 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 February 3, 2015, 61,030,628 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 – December 31, 2014 and June 30, 2014 (Unaudited)

3

 

 

 

 

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

4

 

 

 

 

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

6

 

 

 

 

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

7

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity – Six months ended December 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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 2.

Issuer Purchases of Equity Securities

30

 

 

 

Item 6.

Exhibits

30

 

 

2

 


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)

 

 

 

December 31,

 

 

June 30,

 

 

 

2014

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

154,949

 

 

$

174,660

 

Accounts receivable - less allowance for doubtful accounts of $1,536 at December 31, 2014 and $1,852 at June 30, 2014

 

 

135,403

 

 

 

136,723

 

Inventories

 

 

166,157

 

 

 

165,873

 

Deferred income taxes

 

 

12,442

 

 

 

11,118

 

Prepaid and refundable income taxes

 

 

6,062

 

 

 

4,440

 

Prepaid and other current assets

 

 

14,712

 

 

 

12,917

 

Total Current Assets

 

 

489,725

 

 

 

505,731

 

Property, plant & equipment, net

 

 

206,482

 

 

 

208,939

 

Goodwill

 

 

196,096

 

 

 

196,145

 

Other intangible assets, net

 

 

130,482

 

 

 

136,404

 

Investment

 

 

12,113

 

 

 

11,589

 

Deferred income taxes

 

 

2,240

 

 

 

4,038

 

Other assets

 

 

8,979

 

 

 

9,080

 

Total Assets

 

$

1,046,117

 

 

$

1,071,926

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20,000

 

 

$

20,000

 

Accounts payable

 

 

39,029

 

 

 

45,767

 

Accrued compensation and benefits

 

 

29,933

 

 

 

32,461

 

Accrued income taxes payable

 

 

6,853

 

 

 

4,584

 

Deferred income taxes

 

 

768

 

 

 

732

 

Other accrued liabilities

 

 

29,293

 

 

 

31,521

 

Total Current Liabilities

 

 

125,876

 

 

 

135,065

 

Long-term debt

 

 

192,512

 

 

 

221,960

 

Deferred income taxes

 

 

6,188

 

 

 

7,440

 

Other liabilities

 

 

21,240

 

 

 

32,418

 

Total Liabilities

 

 

345,816

 

 

 

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 - 71,474,853 shares at December 31, 2014; 70,935,098 shares at June 30, 2014

 

 

221,720

 

 

 

213,573

 

Accumulated other comprehensive income

 

 

14,838

 

 

 

19,406

 

Retained earnings

 

 

555,725

 

 

 

521,327

 

 

 

 

792,283

 

 

 

754,306

 

Treasury stock, at cost - 10,478,989 shares at December 31, 2014 and 9,481,963 shares at June 30, 2014

 

 

(91,982

)

 

 

(79,263

)

Total Shareholders' Equity

 

 

700,301

 

 

 

675,043

 

Total Liabilities and Shareholders' Equity

 

$

1,046,117

 

 

$

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

 

 

 

December 31,

 

 

 

2014

 

 

2013

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

68,695

 

 

$

60,569

 

International

 

 

108,041

 

 

 

111,196

 

Total Revenues

 

 

176,736

 

 

 

171,765

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

113,718

 

 

 

118,371

 

Internal research and development

 

 

12,845

 

 

 

11,355

 

Selling, general and administrative

 

 

33,642

 

 

 

32,471

 

Interest expense

 

 

1,038

 

 

 

1,169

 

Other expense (income), net

 

 

(9,295

)

 

 

(1,125

)

Total Costs, Expenses and Other Expense (Income)

 

 

151,948

 

 

 

162,241

 

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations Before Income Taxes

 

 

24,788

 

 

 

9,524

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

2,692

 

 

 

2,086

 

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations

 

 

22,096

 

 

 

7,438

 

 

 

 

 

 

 

 

 

 

Earnings from Discontinued Operation, net of income tax

 

 

-

 

 

 

131

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

22,096

 

 

$

7,569

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.36

 

 

$

0.12

 

Discontinued Operation

 

$

-

 

 

$

-

 

Consolidated

 

$

0.36

 

 

$

0.12

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.35

 

 

$

0.12

 

Discontinued Operation

 

$

-

 

 

$

-

 

Consolidated

 

$

0.35

 

 

$

0.12

 

- See notes to condensed consolidated financial statements.

 

 

4

 


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Earnings (Unaudited)

($000 except per share data)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2014

 

 

2013

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

130,676

 

 

$

124,259

 

International

 

 

231,893

 

 

 

197,526

 

Total Revenues

 

 

362,569

 

 

 

321,785

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

231,692

 

 

 

212,080

 

Internal research and development

 

 

25,788

 

 

 

19,102

 

Selling, general and administrative

 

 

69,162

 

 

 

67,564

 

Interest expense

 

 

2,242

 

 

 

1,652

 

Other expense (income), net

 

 

(7,613

)

 

 

(1,072

)

Total Costs, Expenses and Other Expense (Income)

 

 

321,271

 

 

 

299,326

 

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations Before Income Taxes

 

 

41,298

 

 

 

22,459

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

6,900

 

 

 

5,329

 

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations

 

 

34,398

 

 

 

17,130

 

 

 

 

 

 

 

 

 

 

Earnings from Discontinued Operation, net of income tax

 

 

-

 

 

 

133

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

34,398

 

 

$

17,263

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.56

 

 

$

0.27

 

Discontinued Operation

 

$

-

 

 

$

-

 

Consolidated

 

$

0.56

 

 

$

0.28

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.55

 

 

$

0.27

 

Discontinued Operation

 

$

-

 

 

$

-

 

Consolidated

 

$

0.55

 

 

$

0.27

 

 

- See notes to condensed consolidated financial statements.

 

 

5

 


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

($000)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

22,096

 

 

$

7,569

 

 

$

34,398

 

 

$

17,263

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,491

)

 

 

2,158

 

 

 

(4,166

)

 

 

4,373

 

Pension adjustment, net of taxes of $50 and $107 for the three and six months ended, respectively

 

 

(98

)

 

 

-

 

 

 

(402

)

 

 

-

 

Comprehensive income

 

$

20,507

 

 

$

9,727

 

 

$

29,830

 

 

$

21,636

 

- See notes to condensed consolidated financial statements.

 

6

 


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

($000)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2014

 

 

2013

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net earnings

 

$

34,398

 

 

$

17,263

 

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

 

 

 

 

 

 

 

 

Earnings from discontinued operation, net of tax

 

 

-

 

 

 

(133

)

Depreciation

 

 

20,642

 

 

 

20,656

 

Amortization

 

 

5,990

 

 

 

5,577

 

Share-based compensation expense

 

 

5,955

 

 

 

7,195

 

Loss on foreign currency remeasurements and transactions

 

 

1,611

 

 

 

638

 

Earnings from equity investment

 

 

(516

)

 

 

(378

)

Deferred income taxes

 

 

(621

)

 

 

(1,862

)

Excess tax benefits from share-based compensation expense

 

 

(103

)

 

 

(416

)

Increase (decrease) in cash from changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,675

)

 

 

(4,739

)

Inventories

 

 

(4,892

)

 

 

1,207

 

Accounts payable

 

 

(5,662

)

 

 

18,764

 

Income taxes

 

 

1,456

 

 

 

(3,588

)

Other operating net assets

 

 

(4,139

)

 

 

(5,507

)

Net cash provided by operating activities:

 

 

 

 

 

 

 

 

Continuing Operations

 

 

49,444

 

 

 

54,677

 

Discontinued Operation

 

 

-

 

 

 

1,197

 

Net cash provided by operating activities

 

 

49,444

 

 

 

55,874

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant & equipment

 

 

(31,609

)

 

 

(14,289

)

Proceeds from sale of property, plant & equipment

 

 

101

 

 

 

-

 

Purchases of business, net of cash acquired

 

 

-

 

 

 

(175,201

)

Net cash used in investing activities:

 

 

 

 

 

 

 

 

Continuing Operations

 

 

(31,508

)

 

 

(189,490

)

Net cash used in investing activities

 

 

(31,508

)

 

 

(189,490

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

3,000

 

 

 

183,000

 

Payments on borrowings

 

 

(32,000

)

 

 

(14,000

)

Purchases of treasury stock

 

 

(11,301

)

 

 

-

 

Payments of redeemable noncontrolling interest

 

 

-

 

 

 

(8,789

)

Payment on earnout arrangement

 

 

-

 

 

 

(2,200

)

Proceeds from exercises of stock options

 

 

2,042

 

 

 

2,805

 

Other financing activities

 

 

(894

)

 

 

(1,274

)

Net cash (used in) provided by financing activities

 

 

(39,153

)

 

 

159,542

 

Effect of exchange rate changes on cash and cash equivalents

 

 

1,506

 

 

 

1,324

 

Net increase (decrease) in cash and cash equivalents

 

 

(19,711

)

 

 

27,250

 

Cash and Cash Equivalents at Beginning of Period

 

 

174,660

 

 

 

185,433

 

Cash and Cash Equivalents at End of Period

 

$

154,949

 

 

$

212,683

 

Cash paid for interest

 

$

2,229

 

 

$

1,617

 

Cash paid for income taxes

 

$

6,239

 

 

$

9,123

 

 

 

 

 

 

 

 

 

 

Non cash transactions:

 

 

 

 

 

 

 

 

Purchase of business - holdback amount recorded in Other liabilities

 

$

-

 

 

$

10,000

 

Purchase of business - holdback amount recorded in Other accrued liabilities

 

$

-

 

 

$

2,000

 

Capital lease obligation incurred on facility lease

 

$

-

 

 

$

12,005

 

- 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, 2014

 

 

70,935

 

 

$

213,573

 

 

$

19,406

 

 

$

521,327

 

 

 

(9,482

)

 

$

(79,263

)

 

$

675,043

 

Shares issued under share-based compensation plans

 

 

468

 

 

 

2,042

 

 

 

-

 

 

 

-

 

 

 

(71

)

 

 

(1,004

)

 

 

1,038

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

34,398

 

 

 

-

 

 

 

-

 

 

 

34,398

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(854

)

 

 

(11,301

)

 

 

(11,301

)

Treasury stock under deferred compensation arrangements

 

 

72

 

 

 

414

 

 

 

-

 

 

 

-

 

 

 

(72

)

 

 

(414

)

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

(4,166

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,166

)

Share-based compensation expense

 

 

-

 

 

 

5,955

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,955

 

Pension adjustment, net of taxes of $107

 

 

-

 

 

 

-

 

 

 

(402

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(402

)

Tax deficiency from share-based compensation expense

 

 

-

 

 

 

(264

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(264

)

Balance - December 31, 2014

 

 

71,475

 

 

$

221,720

 

 

$

14,838

 

 

$

555,725

 

 

 

(10,479

)

 

$

(91,982

)

 

$

700,301

 

- 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 six months ended December 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, 2014. The consolidated results of operations for the three and six months ended December 31, 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

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenues

 

$

-

 

 

$

697

 

 

$

-

 

 

$

1,849

 

Earnings from discontinued operation before income taxes

 

 

-

 

 

 

131

 

 

 

-

 

 

 

133

 

Income tax benefit (expense)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Earnings from discontinued operation, net of taxes

 

$

-

 

 

$

131

 

 

$

-

 

 

$

133

 

 

 

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 U.S. 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.

9

 


 

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 was 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 was 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 December 31, 2014 and June 30, 2014 was $12.1 million and $11.6 million, respectively. During the three months ended December 31, 2014 and 2013, the Company’s pro-rata share of earnings from this investment was $0.2 million and $0.1 million, respectively, and was $0.5 million and $0.4 million during the six months ended December 31, 2014 and 2013, respectively, 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):

 

 

 

December 31,

 

 

June 30,

 

 

 

2014

 

 

2014

 

Raw materials

 

$

67,578

 

 

$

71,949

 

Work in progress

 

 

54,749

 

 

 

44,739

 

Finished goods

 

 

43,830

 

 

 

49,185

 

 

 

$

166,157

 

 

$

165,873

 

 

Note  6.

Property, Plant and Equipment

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

 

 

 

December 31,

 

 

June 30,

 

 

 

2014

 

 

2014

 

Land and land improvements

 

$

2,590

 

 

$

2,381

 

Buildings and improvements

 

 

97,595

 

 

 

96,551

 

Machinery and equipment

 

 

346,153

 

 

 

335,408

 

Construction in progress

 

 

22,226

 

 

 

16,990

 

 

 

 

468,564

 

 

 

451,330

 

Less accumulated depreciation

 

 

(262,082

)

 

 

(242,391

)

 

 

$

206,482

 

 

$

208,939

 

10

 


 

 

Note  7.

Goodwill and Other Intangible Assets

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

 

 

 

Six Months Ended December 31, 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

 

 

(232

)

 

 

183

 

 

 

-

 

 

 

(49

)

Balance-end of period

 

$

43,809

 

 

$

99,397

 

 

$

52,890

 

 

$

196,096

 

 

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 a 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 had the option to perform a qualitative assessment of goodwill prior to completing the quantitative test to determine whether it was more likely than not that the fair value of a reporting unit was 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 six months ended December 31, 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 December 31, 2014 and June 30, 2014 were as follows ($000):

 

 

 

December 31, 2014

 

 

June 30, 2014

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

50,543

 

 

$

(16,667

)

 

$

33,876

 

 

$

50,505

 

 

$

(14,474

)

 

$

36,031

 

Trademarks

 

 

17,889

 

 

 

(1,074

)

 

 

16,815

 

 

 

17,870

 

 

 

(1,037

)

 

 

16,833

 

Customer Lists

 

 

102,636

 

 

 

(22,978

)

 

 

79,658

 

 

 

102,839

 

 

 

(19,448

)

 

 

83,391

 

Other

 

 

1,578

 

 

 

(1,445

)

 

 

133

 

 

 

1,586

 

 

 

(1,437

)

 

 

149

 

Total

 

$

172,646

 

 

$

(42,164

)

 

$

130,482

 

 

$

172,800

 

 

$

(36,396

)

 

$

136,404

 

 

Amortization expense recorded on the Company’s intangible assets was $2.9 million and $6.0 million for the three and six months ended December 31, 2014, respectively, and was $3.4 million and $5.6 million for the three and six months ended December 31, 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 113 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 145 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”).

 

11

 


 

At December 31, 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

 

 

 

$

5,859

 

2016

 

 

 

 

11,619

 

2017

 

 

 

 

11,609

 

2018