10-Q 1 iivi-10q_20150331.htm 10-Q

 

 

 

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, 2015

¨

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, 2015, 61,066,939 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, 2015 and June 30, 2014 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Earnings – Three and nine months ended March 31, 2015 and 2014 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Three and nine months ended March 31, 2015 and 2014 (Unaudited)

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Nine months ended March 31, 2015 and 2014 (Unaudited)

7

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity – Nine months ended March 31, 2015 (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

28

 

 

 

Item 4.

Controls and Procedures

29

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Issuer Purchases of Equity Securities

29

 

 

 

Item 6.

Exhibits

30

 

 

2

 


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)

 

 

 

March 31,

 

 

June 30,

 

 

 

2015

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

154,703

 

 

$

174,660

 

Accounts receivable - less allowance for doubtful accounts of $1,264 at March 31, 2015 and $1,852 at June 30, 2014

 

 

134,982

 

 

 

136,723

 

Inventories

 

 

164,401

 

 

 

165,873

 

Deferred income taxes

 

 

12,193

 

 

 

11,118

 

Prepaid and refundable income taxes

 

 

7,139

 

 

 

4,440

 

Prepaid and other current assets

 

 

15,429

 

 

 

12,917

 

Total Current Assets

 

 

488,847

 

 

 

505,731

 

Property, plant & equipment, net

 

 

202,073

 

 

 

208,939

 

Goodwill

 

 

195,634

 

 

 

196,145

 

Other intangible assets, net

 

 

125,399

 

 

 

136,404

 

Investment

 

 

12,296

 

 

 

11,589

 

Deferred income taxes

 

 

5,170

 

 

 

4,038

 

Other assets

 

 

8,849

 

 

 

9,080

 

Total Assets

 

$

1,038,268

 

 

$

1,071,926

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20,000

 

 

$

20,000

 

Accounts payable

 

 

40,960

 

 

 

45,767

 

Accrued compensation and benefits

 

 

32,514

 

 

 

32,461

 

Accrued income taxes payable

 

 

7,641

 

 

 

4,584

 

Deferred income taxes

 

 

806

 

 

 

732

 

Other accrued liabilities

 

 

28,378

 

 

 

31,521

 

Total Current Liabilities

 

 

130,299

 

 

 

135,065

 

Long-term debt

 

 

168,002

 

 

 

221,960

 

Deferred income taxes

 

 

7,464

 

 

 

7,440

 

Other liabilities

 

 

21,641

 

 

 

32,418

 

Total Liabilities

 

 

327,406

 

 

 

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 - 71,688,493 shares at March 31, 2015; 70,935,098 shares at June 30, 2014

 

 

226,600

 

 

 

213,573

 

Accumulated other comprehensive income

 

 

7,517

 

 

 

19,406

 

Retained earnings

 

 

570,233

 

 

 

521,327

 

 

 

 

804,350

 

 

 

754,306

 

Treasury stock, at cost - 10,564,849 shares at March 31, 2015 and 9,481,963 shares at June 30, 2014

 

 

(93,488

)

 

 

(79,263

)

Total Shareholders' Equity

 

 

710,862

 

 

 

675,043

 

Total Liabilities and Shareholders' Equity

 

$

1,038,268

 

 

$

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

 

 

 

March 31,

 

 

 

2015

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

68,233

 

 

$

54,424

 

International

 

 

114,476

 

 

 

119,131

 

Total Revenues

 

 

182,709

 

 

 

173,555

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

116,984

 

 

 

118,865

 

Internal research and development

 

 

12,874

 

 

 

12,099

 

Selling, general and administrative

 

 

35,192

 

 

 

33,848

 

Interest expense

 

 

844

 

 

 

1,412

 

Other expense (income), net

 

 

1,534

 

 

 

(1,694

)

Total Costs, Expenses and Other Expense (Income)

 

 

167,428

 

 

 

164,530

 

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations Before Income Taxes

 

 

15,281

 

 

 

9,025

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

773

 

 

 

494

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

14,508

 

 

$

8,531

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

Consolidated

 

$

0.24

 

 

$

0.14

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

Consolidated

 

$

0.23

 

 

$

0.13

 

- 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,

 

 

 

2015

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

198,909

 

 

$

178,683

 

International

 

 

346,369

 

 

 

316,657

 

Total Revenues

 

 

545,278

 

 

 

495,340

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

348,676

 

 

 

330,945

 

Internal research and development

 

 

38,662

 

 

 

31,201

 

Selling, general and administrative

 

 

104,354

 

 

 

101,412

 

Interest expense

 

 

3,086

 

 

 

3,064

 

Other expense (income), net

 

 

(6,079

)

 

 

(2,766

)

Total Costs, Expenses and Other Expense (Income)

 

 

488,699

 

 

 

463,856

 

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations Before Income Taxes

 

 

56,579

 

 

 

31,484

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

7,673

 

 

 

5,823

 

 

 

 

 

 

 

 

 

 

Earnings from Continuing Operations

 

 

48,906

 

 

 

25,661

 

 

 

 

 

 

 

 

 

 

Earnings from Discontinued Operation, net of income tax

 

 

-

 

 

 

133

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

48,906

 

 

$

25,794

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.80

 

 

$

0.41

 

Discontinued Operation

 

$

-

 

 

$

-

 

Consolidated

 

$

0.80

 

 

$

0.41

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

Continuing Operations

 

$

0.78

 

 

$

0.40

 

Discontinued Operation

 

$

-

 

 

$

-

 

Consolidated

 

$

0.78

 

 

$

0.40

 

 

- 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,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

14,508

 

 

$

8,531

 

 

$

48,906

 

 

$

25,794

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(7,343

)

 

 

(2,123

)

 

 

(11,509

)

 

 

2,250

 

Pension adjustment, net of taxes of $(6) and $101 for the three and nine months ended, respectively

 

 

22

 

 

 

-

 

 

 

(380

)

 

 

-

 

Comprehensive income

 

$

7,187

 

 

$

6,408

 

 

$

37,017

 

 

$

28,044

 

- 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,

 

 

 

2015

 

 

2014

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net earnings

 

$

48,906

 

 

$

25,794

 

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

 

 

 

 

 

 

 

 

Earnings from discontinued operation, net of tax

 

 

-

 

 

 

(133

)

Depreciation

 

 

30,259

 

 

 

31,191

 

Amortization

 

 

8,983

 

 

 

8,234

 

Share-based compensation expense

 

 

8,586

 

 

 

9,732

 

Impairment of intangible assets

 

 

1,962

 

 

 

-

 

Loss on foreign currency remeasurements and transactions

 

 

1,892

 

 

 

380

 

Earnings from equity investment

 

 

(707

)

 

 

(517

)

Deferred income taxes

 

 

(2,104

)

 

 

(1,814

)

Excess tax benefits from share-based compensation expense

 

 

(404

)

 

 

(522

)

Increase (decrease) in cash from changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,972

)

 

 

(17,719

)

Inventories

 

 

(5,721

)

 

 

3,886

 

Accounts payable

 

 

(3,625

)

 

 

21,943

 

Income taxes

 

 

677

 

 

 

(7,810

)

Other operating net assets

 

 

2,971

 

 

 

(5,237

)

Net cash provided by operating activities:

 

 

 

 

 

 

 

 

Continuing Operations

 

 

85,703

 

 

 

67,408

 

Discontinued Operation

 

 

-

 

 

 

1,197

 

Net cash provided by operating activities

 

 

85,703

 

 

 

68,605

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant & equipment

 

 

(40,163

)

 

 

(20,767

)

Purchases of business, net of cash acquired

 

 

-

 

 

 

(177,676

)

Other investing activities

 

 

64

 

 

 

226

 

Net cash used in investing activities

 

 

(40,099

)

 

 

(198,217

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

3,000

 

 

 

183,000

 

Payments on borrowings

 

 

(56,500

)

 

 

(34,000

)

Purchases of treasury stock

 

 

(12,729

)

 

 

(10,957

)

Payments of redeemable noncontrolling interest

 

 

-

 

 

 

(8,789

)

Payments on holdback arrangements

 

 

(2,350

)

 

 

(2,200

)

Proceeds from exercises of stock options

 

 

4,058

 

 

 

3,613

 

Other financing activities

 

 

(610

)

 

 

(1,375

)

Net cash (used in) provided by financing activities

 

 

(65,131

)

 

 

129,292

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(430

)

 

 

578

 

Net (decrease) increase in cash and cash equivalents

 

 

(19,957

)

 

 

258

 

Cash and Cash Equivalents at Beginning of Period

 

 

174,660

 

 

 

185,433

 

Cash and Cash Equivalents at End of Period

 

$

154,703

 

 

$

185,691

 

Cash paid for interest

 

$

3,081

 

 

$

2,883

 

Cash paid for income taxes

 

$

9,025

 

 

$

12,545

 

 

 

 

 

 

 

 

 

 

Non cash transactions:

 

 

 

 

 

 

 

 

Purchases of businesses - holdback amount recorded in Other accrued liabilities

 

$

-

 

 

$

10,000

 

Capital lease obligation incurred on facility lease

 

$

-

 

 

$

11,857

 

- 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

 

 

681

 

 

 

4,058

 

 

 

-

 

 

 

-

 

 

 

(75

)

 

 

(1,082

)

 

 

2,976

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

48,906

 

 

 

-

 

 

 

-

 

 

 

48,906

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(936

)

 

 

(12,729

)

 

 

(12,729

)

Treasury stock under deferred compensation arrangements

 

 

72

 

 

 

414

 

 

 

-

 

 

 

-

 

 

 

(72

)

 

 

(414

)

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

(11,509

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11,509

)

Share-based compensation expense

 

 

-

 

 

 

8,586

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,586

 

Pension adjustment, net of taxes of $101

 

 

-

 

 

 

-

 

 

 

(380

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(380

)

Tax deficiency from share-based compensation expense

 

 

-

 

 

 

(31

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(31

)

Balance - March 31, 2015

 

 

71,688

 

 

$

226,600

 

 

$

7,517

 

 

$

570,233

 

 

 

(10,565

)

 

$

(93,488

)

 

$

710,862

 

- 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, 2015 and 2014 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 nine months ended March 31, 2015 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

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1,849

 

Earnings from discontinued operation before income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

133

 

Income tax benefit (expense)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Earnings from discontinued operation, net of taxes

 

$

-

 

 

$

-

 

 

$

-

 

 

$

133

 

 

 

Note  3.

Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued as final, an Accounting Standards Update (“ASU”) 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance about whether a cloud computing arrangement includes a software license. The update is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The update allows for the use of either a prospective or retrospective adoption approach. Management is currently evaluating the available transition methods and the potential impact of adoption on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.  This ASU requires entities to present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability, consistent with debt discounts. The guidance does not address situations in which debt issuance costs do not have an associated debt liability or exceed the carrying amount of the associated debt liability. This ASU will be effective beginning in fiscal year 2017. Management is currently evaluating the potential impact of adoption on the Company's consolidated financial statements.

 

In February 2015, the FASB issued as final, ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which affects reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The update allows for the use of either a full retrospective or a modified retrospective

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adoption approach. Management is currently evaluating the available transition methods and the potential impact of adoption on the Company’s consolidated financial statements.

 

In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items. This ASU eliminates the requirement to separately present and disclose extraordinary and unusual items in the financial statements. This ASU will be effective beginning in 2016. The adoption of this ASU is not expected to have a material effect on our consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606) which 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. Currently the update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. The update allows for the use of either the retrospective or modified retrospective approach of adoption. On April 29, 2015, the FASB issued an exposure draft (ED) of a proposed ASU that would delay by one year the effective date of its new revenue recognition standard.  Under the proposal, the standard would be effective of public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein.  The proposal would permit adoption of the standard as early as the original public entity effective date.  Early adoption prior to that date would not be permitted. Management currently is evaluating the available transition methods and the potential impact of adoption on the Company's consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which 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 ASU 2013-11: Presentation of an Unrecognized Tax benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit carryforward Exists.  The ASU 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.

 

 

 

 

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 March 31, 2015 and June 30, 2014 was $12.3 million and $11.6 million, respectively. During the three months ended March 31, 2015 and 2014, the Company’s pro-rata share of earnings from this investment was $0.2 million and $0.1 million, respectively, and was $0.7 million and $0.5 million during the nine months ended March 31, 2015 and 2014, 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):

 

 

 

March 31,

 

 

June 30,

 

 

 

2015

 

 

2014

 

Raw materials

 

$

65,734

 

 

$

71,949

 

Work in progress

 

 

59,550

 

 

 

44,739

 

Finished goods

 

 

39,117

 

 

 

49,185

 

 

 

$

164,401

 

 

$

165,873

 

 

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Note  6.

Property, Plant and Equipment

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

 

 

 

March 31,

 

 

June 30,

 

 

 

2015

 

 

2014

 

Land and land improvements

 

$

2,407

 

 

$

2,381

 

Buildings and improvements

 

 

91,424

 

 

 

96,551

 

Machinery and equipment

 

 

354,862

 

 

 

335,408

 

Construction in progress

 

 

20,320

 

 

 

16,990

 

 

 

 

469,013

 

 

 

451,330

 

Less accumulated depreciation

 

 

(266,940

)

 

 

(242,391

)

 

 

$

202,073

 

 

$

208,939

 

During the quarter ended March 31, 2015, as part of the Company’s ongoing restructuring of its military related businesses in the Performance Products segment, the Company implemented a plan to sell one of its manufacturing facilities located in New Port Richey, Florida. The Company anticipates completing the sale within the next twelve months, has reclassified the carrying value of the land and building of approximately $1.2 million as assets held for sale and has included the carrying value in Prepaid and other current assets in the Condensed Consolidated Balance Sheets at March 31, 2015.

Note  7.

Goodwill and Other Intangible Assets

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

 

 

 

Nine Months Ended March 31, 2015

 

 

 

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

 

 

(567

)

 

 

56

 

 

 

-

 

 

 

(511

)

Balance-end of period

 

$

43,474

 

 

$

99,270

 

 

$

52,890

 

 

$

195,634

 

 

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 during the nine months ended March 31, 2015, as the qualitative assessment did not indicate deterioration in the fair value of its reporting units since the most recent annual impairment test.

 

During the quarter ended March 31, 2015, the Company recognized an impairment charge on two of its indefinite lived trademarks in the Photonics reporting unit as these trademarks were abandoned as a result of the Company rebranding efforts. Total impairment recorded during the quarter ended March 31, 2015 was $2.0 million, which represented the entire carrying value of these two trademarks and was recorded in Other expense (income), net in the Condensed Consolidated Statements of Earnings.

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The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of March 31, 2015 and June 30, 2014 were as follows ($000):

 

 

 

March 31, 2015

 

 

June 30, 2014

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

50,460

 

 

$

(17,710

)

 

$

32,750

 

 

$

50,505

 

 

$

(14,474

)

 

$

36,031

 

Trademarks

 

 

15,853

 

 

 

(1,092

)

 

 

14,761

 

 

 

17,870

 

 

 

(1,037

)

 

 

16,833

 

Customer Lists

 

 

102,383

 

 

 

(24,619

)

 

 

77,764

 

 

 

102,839

 

 

 

(19,448

)

 

 

83,391

 

Other

 

 

1,569

 

 

 

(1,445

)

 

 

124

 

 

 

1,586

 

 

 

(1,437

)

 

 

149

 

Total

 

$

170,265

 

 

$

(44,866

)

 

$

125,399

 

 

$

172,800

 

 

$

(36,396

)

 

$

136,404

 

 

Amortization expense recorded on the Company’s intangible assets was $3.0 million and $9.0 million for the three and nine months ended March 31, 2015, respectively, and was $2.6 million and $8.2 million for the three and nine months ended March 31, 2014, respectively.  The technology and patents are being amortized over a range of 60 to 240 months, with a weighted average remaining life of approximately 114 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 146 months. The gross carrying amount of trademarks includes $14.4 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”).

 

At March 31, 2015, 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

 

 

 

$

2,921

 

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):

 

 

March 31,

 

 

June 30,

 

 

2015

 

 

2014

 

Line of credit, interest at LIBOR, as defined, plus 1.5% and 1.75%, respectively

$

115,500

 

 

$

154,000

 

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

 

70,000

 

 

 

85,000

 

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

 

2,502

 

 

 

2,960

 

Total debt

 

188,002

 

 

 

241,960

 

Current portion of long-term debt

 

(20,000

)

 

 

(20,000

)

Long-term debt, less current portion

$

168,002

 

 

$

221,960

 

 

 

The Company’s 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 repaid 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 March 31, 2015, th