iivi-10q_20150930.htm

Year Ending June 30,

Remaining 2016

(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):

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 2, 2015, 61,138,290 shares of Common Stock, no par value, of the registrant were outstanding.

	September 30,			June 30,
	2015			2015
Assets
Current Assets
Cash and cash equivalents	$	163,779		$	173,634
Accounts receivable - less allowance for doubtful accounts of $1,271 at September 30, 2015 and $1,048 at June 30, 2015		133,305			140,772
Inventories		167,266			164,388
Deferred income taxes		13,141			13,260
Prepaid and refundable income taxes		7,532			6,881
Prepaid and other current assets		12,130			14,033
Total Current Assets		497,153			512,968
Property, plant & equipment, net		201,001			203,812
Goodwill		194,594			195,894
Other intangible assets, net		119,097			122,462
Investment		12,178			11,914
Deferred income taxes		1,013			2,210
Other assets		8,990			8,904
Total Assets	$	1,034,026		$	1,058,164

Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt	$	20,000		$	20,000
Accounts payable		39,357			45,275
Accrued compensation and benefits		31,485			39,310
Accrued income taxes payable		10,376			9,310
Deferred income taxes		659			685
Other accrued liabilities		22,921			24,576
Total Current Liabilities		124,798			139,156
Long-term debt		142,493			155,957
Deferred income taxes		5,565			7,105
Other liabilities		26,409			26,865
Total Liabilities		299,265			329,083
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 - 72,153,590 shares at September 30, 2015; 71,779,704 shares at June 30, 2015		231,369			226,609
Accumulated other comprehensive income		550			8,665
Retained earnings		604,516			587,302
		836,435			822,576
Treasury stock, at cost - 11,052,754 shares at September 30, 2015 and 10,565,209 shares at June 30, 2015		(101,674	)		(93,495	)
Total Shareholders' Equity		734,761			729,081
Total Liabilities and Shareholders' Equity	$	1,034,026		$	1,058,164

	Three Months Ended
	September 30,
	2015			2014
Revenues
Domestic	$	70,751		$	61,981
International		118,456			123,852
Total Revenues		189,207			185,833

Costs, Expenses and Other Expense (Income)
Cost of goods sold		118,018			117,974
Internal research and development		13,151			12,943
Selling, general and administrative		36,310			35,520
Interest expense		649			1,204
Other expense (income), net		(1,057	)		1,682
Total Costs, Expenses and Other Expense (Income)		167,071			169,323

Earnings Before Income Taxes		22,136			16,510

Income Taxes		4,922			4,208

Net Earnings	$	17,214		$	12,302

Basic Earnings Per Share:	$	0.28		$	0.20

Diluted Earnings Per Share:	$	0.27		$	0.20

	Three Months Ended
	September 30,
	2015			2014
Cash Flows from Operating Activities
Net earnings	$	17,214		$	12,302
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		10,345			10,511
Amortization		2,960			3,050
Share-based compensation expense		4,009			3,594
(Gain) Loss on foreign currency remeasurements and transactions		(712	)		2,181
Earnings from equity investment		(264	)		(267	)
Deferred income taxes		(360	)		1,979
Excess tax benefits from share-based compensation expense		(30	)		-
Increase (decrease) in cash from changes in:
Accounts receivable		6,459			(30,686	)
Inventories		(5,489	)		(672	)
Accounts payable		(5,073	)		2,975
Income taxes		766			159
Other operating net assets		(7,646	)		(4,270	)
Net cash provided by operating activities		22,179			856
Cash Flows from Investing Activities
Additions to property, plant & equipment		(9,424	)		(21,530	)
Other investing activities		25			-
Net cash used in investing activities		(9,399	)		(21,530	)
Cash Flows from Financing Activities
Proceeds from borrowings		4,000			-
Payments on borrowings		(17,500	)		(5,000	)
Purchases of treasury stock		(5,884	)		(5,093	)
Proceeds from exercises of stock options		766			1,504
Other financing activities		(1,650	)		(1,248	)
Net cash used in financing activities		(20,268	)		(9,837	)
Effect of exchange rate changes on cash and cash equivalents		(2,367	)		1,266
Net decrease in cash and cash equivalents		(9,855	)		(29,245	)
Cash and Cash Equivalents at Beginning of Period		173,634			174,660
Cash and Cash Equivalents at End of Period	$	163,779		$	145,415
Cash paid for interest	$	657		$	1,169
Cash paid for income taxes	$	4,535		$	4,440

Non cash transactions:
Purchases of treasury stock recorded in Other accrued liabilities	$	400		$	1,200

						Accumulated
						Other
	Common Stock					Comprehensive			Retained		Treasury Stock
	Shares		Amount			Income			Earnings		Shares			Amount			Total

Balance - June 30, 2015		71,780	$	226,609		$	8,665		$	587,302		(10,565	)	$	(93,495	)	$	729,081
Shares issued under share-based compensation plans		360		766			-			-		-			-			766
Shares acquired in satisfaction of minimum tax withholding obligations		-		-			-			-		(94	)		(1,680	)		(1,680	)
Net earnings		-		-			-			17,214		-			-			17,214
Purchases of treasury stock		-		-			-			-		(381	)		(6,284	)		(6,284	)
Treasury stock under deferred compensation arrangements		13		215			-			-		(13	)		(215	)		-
Foreign currency translation adjustments		-		-			(8,151	)		-		-			-			(8,151	)
Share-based compensation expense		-		4,009			-			-		-			-			4,009
Pension adjustment, net of taxes of $10		-		-			36			-		-			-			36
Tax deficiency from share-based compensation expense		-		(230	)		-			-		-			-			(230	)
Balance - September 30, 2015		72,153	$	231,369		$	550		$	604,516		(11,053	)	$	(101,674	)	$	734,761

The condensed consolidated financial statements of II-VI Incorporated (“II-VI” or the “Company”) for the three months ended September 30, 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, 2015. The consolidated results of operations for the three months ended September 30, 2015 are not necessarily indicative of the results to be expected for the full fiscal year. The June 30, 2015 Condensed Consolidated Balance Sheet information was derived from the Company’s audited financial statements.

In July 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This update simplifies the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new inventory measurement requirements will be effective for the Company’s 2018 fiscal year and will replace the current inventory valuation guidance that requires the use of a lower of cost or market framework. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

In April 2015, the FASB issued 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 will be 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. The update will be effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2015. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

In February 2015, the FASB issued, 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 will be 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 adoption approach. The adoption of this ASU is not expected to have a material effect on the Company’s 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. The update allows for the use of either the retrospective or modified retrospective approach of adoption. On July 9, 2015 the FASB approved a one year deferral of the effective date of the update. The update will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (the first quarter of our fiscal year 2019). We have not yet selected a transition method and are currently evaluating the impact of this guidance 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 was effective for the Company in the first quarter of fiscal year 2016. The adoption of this standard did not have a significant impact on the Company’s Consolidated Financial Statements.

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, 2015 and June 30, 2015 was $12.2 million and $11.9 million, respectively. During each of the three months ended September 30, 2015 and 2014, 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.

During fiscal year 2015, as part of the Company’s 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 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 for the periods presented.

Note 1 of the Notes to Consolidated Financial Statements in the Company’s most recent Annual Report on Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management has evaluated goodwill for indicators of impairment and has concluded that there are no indicators of impairment as of September 30, 2015.

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

	September 30, 2015							June 30, 2015
	Gross					Net		Gross					Net
	Carrying		Accumulated			Book		Carrying		Accumulated			Book
	Amount		Amortization			Value		Amount		Amortization			Value
Technology and Patents	$	50,136	$	(19,632	)	$	30,504	$	50,520	$	(18,838	)	$	31,682
Trademarks		15,732		(1,130	)		14,602		15,869		(1,111	)		14,758
Customer Lists		102,187		(28,303	)		73,884		102,489		(26,583	)		75,906
Other		1,572		(1,465	)		107		1,572		(1,456	)		116
Total	$	169,627	$	(50,530	)	$	119,097	$	170,450	$	(47,988	)	$	122,462

Amortization expense recorded on the Company’s intangible assets was $3.0 million and $3.1 million for the three months ended September 30, 2015 and 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 106 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 138 months. The gross carrying amount of trademarks includes $14.2 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 and Chinese subsidiaries.

At September 30, 2015, the estimated amortization expense for existing intangible assets for each of the five succeeding fiscal years is as follows ($000):

The Company’s Second 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 of September 10, 2018. 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 10, 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, 2015, 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 (approximately $4.1 million) facility. The Yen line of credit was extended in September 2015 through August 2020 on substantially the same terms. The interest rate is equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.50%. At September 30, 2015 and June 30, 2015, 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, 2015, the Company was in compliance with all financial covenants under its Yen facility.

The Company had aggregate availability of $125.1 million and $116.6 million under its lines of credit as of September 30, 2015 and June 30, 2015, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of September 30, 2015 and June 30, 2015, total outstanding letters of credit supported by these credit facilities were $1.5 million.

The weighted average interest rate of total borrowings was 1.5% and 1.9% for the three months ended September 30, 2015 and 2014, respectively.

Remaining annual principal payments under the Company’s existing credit facilities as of September 30, 2015 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		-		-		20,000
Year 3		20,000		-		100,000		120,000
Year 4		-		-		-		-
Year 5		-		2,493		-		2,493
Total	$	60,000	$	2,493	$	100,000	$	162,493

The Company’s year-to-date effective income tax rate at September 30, 2015 and 2014 was 22.2% and 25.5%, respectively. The variations between the Company’s effective tax rate 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, 2015 and June 30, 2015, the Company’s gross unrecognized income tax benefit was $4.5 million and $4.0 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, 2015 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 $4.5 million and $4.0 million of gross unrecognized income tax benefit at September 30, 2015 and June 30, 2015, respectively, was immaterial. Fiscal years 2012 to 2015 remain open to examination by the United States Internal Revenue Service, fiscal years 2011 to 2015 remain open to examination by certain state jurisdictions, and fiscal years 2008 to 2015 remain open to examination by certain foreign taxing jurisdictions. The Company’s fiscal year 2011 and 2012 California state income tax returns are currently under examination by the state of California’s Franchise Tax Board. The Company’s fiscal year 2012 and 2013 German income tax returns are currently under examination.

The following table sets forth the computation of earnings per share for the periods indicated. Weighted average shares issuable upon the exercises of stock options and the release of performance and restricted shares not included in the calculation because they were anti-dilutive totaled approximately 232,000 and 877,000 for the three months ended September 30, 2015 and 2014, respectively ($000 except per share data):

	Three Months Ended
	September 30,
	2015		2014

Net earnings	$	17,214	$	12,302
Divided by:
Weighted average shares		61,223		61,508

Basic earnings per common share:	$	0.28	$	0.20

Net earnings	$	17,214	$	12,302
Divided by:
Weighted average shares		61,223		61,508
Dilutive effect of common stock equivalents		1,506		1,281
Diluted weighted average common shares		62,729		62,789

Diluted earnings per common share:	$	0.27	$	0.20

The Company reports its business segments using the “management approach” model for segment reporting. This means that the Company determines its reportable business segments based on the way the chief operating decision maker organizes business segments within the Company for making operating decisions and assessing performance.

The Company reports its financial results in the following three segments: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance Products, and the Company’s chief operating decision maker receives and reviews financial information based on these segments. The Company evaluates business segment performance based upon segment operating income, which is defined as earnings before income taxes, interest and other income or expense. The segments are managed separately due to the market, production requirements and facilities unique to each segment.

The II-VI Laser Solutions segment is located in the U.S., Singapore, China, Germany, Switzerland, Japan, Belgium, the U.K., Italy, South Korea and the Philippines. II-VI Laser Solutions is directed by the President of II-VI Laser Solutions, while each geographic location is directed by a general manager, and is further divided into production and administrative units that are directed by managers. II-VI Laser Solutions designs, manufactures and markets optical and electro-optical components and materials sold under the II-VI Infrared brand name and used primarily in high-power CO₂ lasers. II-VI Laser Solutions also manufactures fiber-delivered beam delivery systems and processing tools and direct diode lasers for industrial lasers sold under the II-VI HIGHYAG and II-VI Laser Enterprise brand names.

The II-VI Photonics segment is located in the U.S., China, Vietnam, Germany, Japan, the U.K., Italy and Hong Kong. II-VI Photonics is directed by the President of II-VI Photonics and is further divided into production and administrative units that are directed by managers. II-VI Photonics manufactures crystal materials, optics, microchip lasers and opto-electronic modules for use in optical communication networks and other diverse consumer and commercial applications. In addition, the segment also manufactures pump lasers, and optical amplifiers and micro-optics for optical amplifiers for both terrestrial and submarine applications within the optical communications market.

The II-VI Performance Products segment is located in the U.S., Vietnam, Japan, China, Germany and the Philippines. II-VI Performance Products is directed by a Corporate Executive Vice President, while each geographic location is directed by a general manager. II-VI Performance Products is further divided into production and administrative units that are directed by managers. II-VI Performance Products designs, manufactures and markets infrared optical components and high-precision optical assemblies for military, medical and commercial laser imaging applications. In addition, the segment designs, manufactures and markets unique engineered materials for thermo-electric and silicon carbide applications servicing the semiconductor, military and medical markets.

The accounting policies of the segments are the same as those of the Company. The Company’s corporate expenses are allocated to the segments. The Company evaluates segment performance based upon reported segment operating income, which is defined as earnings from continuing operations before income taxes, interest and other income or expense. Inter-segment sales and transfers have been eliminated.

The following tables summarize selected financial information of the Company’s operations by segment ($000):

	Three Months Ended September 30, 2015
	II-VI				II-VI
	Laser		II-VI		Performance
	Solutions		Photonics		Products		Eliminations			Total
Revenues	$	71,583	$	71,895	$	45,729	$	-		$	189,207
Inter-segment revenues		4,530		3,031		2,395		(9,956	)		-
Operating income		12,175		6,284		3,269		-			21,728
Interest expense		-		-		-		-			(649	)
Other income (expense), net		-

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)


Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

		Page No.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets – September 30, 2015 and June 30, 2015 (Unaudited)	3

	Condensed Consolidated Statements of Earnings – Three months ended September 30, 2015 and 2014 (Unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income – Three months ended September 30, 2015 and 2014 (Unaudited)	5

	Condensed Consolidated Statements of Cash Flows – Three months ended September 30, 2015 and 2014 (Unaudited)	6

	Condensed Consolidated Statement of Shareholders’ Equity – Three months ended September 30, 2015 (Unaudited)	7

	Notes to Condensed Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	25

PART II - OTHER INFORMATION

Item 1A.	Risk Factors	25

Item 2.	Issuer Purchases of Equity Securities	25

Item 6.	Exhibits	26

	September 30,		June 30,
	2015		2015
Raw materials	$	68,811	$	71,210
Work in progress		57,106		52,726
Finished goods		41,349		40,452
	$	167,266	$	164,388

	September 30,			June 30,
	2015			2015
Land and land improvements	$	4,568		$	4,566
Buildings and improvements		91,060			91,171
Machinery and equipment		366,827			366,560
Construction in progress		22,164			17,749
		484,619			480,046
Less accumulated depreciation		(283,618	)		(276,234	)
	$	201,001		$	203,812

	Three Months Ended September 30, 2015
	II-VI Laser		II-VI			II- VI Performance
	Solutions		Photonics			Products		Total
Balance-beginning of period	$	43,578	$	99,426		$	52,890	$	195,894
Foreign currency translation		2		(1,302	)		-		(1,300	)
Balance-end of period	$	43,580	$	98,124		$	52,890	$	194,594