10-Q 1 iivi-10q_20150930.htm 10-Q iivi-10q_20150930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended September 30, 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 November 2, 2015, 61,138,290 shares of Common Stock, no par value, of the registrant were outstanding.

 

 

 

 

 

 

 


II-VI INCORPORATED

INDEX

 

 

 

Page No.

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – September 30, 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

 

 

 

2


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)

 

 

 

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

 

 

- See notes to condensed consolidated financial statements.

 

 

3


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Earnings (Unaudited)

($000 except per share data)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

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

 

 

- See notes to condensed consolidated financial statements.

 

 

4


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

($000)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

17,214

 

 

$

12,302

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(8,151

)

 

 

(2,675

)

Pension adjustment, net of taxes of $10 and ($57) for the three months ended, respectively

 

 

36

 

 

 

(304

)

Comprehensive income

 

$

9,099

 

 

$

9,323

 

 

- See notes to condensed consolidated financial statements.

 

5


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

($000)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

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

 

 

- See notes to condensed consolidated financial statements.

 

6


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

(000)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Comprehensive

 

 

Retained

 

 

Treasury Stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Income

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 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

 

 

- See notes to condensed consolidated financial statements.

 

 

 

7


II-VI Incorporated and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note  1.

Basis of Presentation

The condensed consolidated financial statements of II-VI Incorporated (“II-VI” or the “Company”) for the three months ended September 30, 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.

 

 

Note  2.

Recent Accounting Pronouncements

 

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

8


 

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.

 

 

Note  3.

Investment

The Company has an equity investment of 20.2% in Guangdong Fuxin Electronic Technology (“Fuxin”) based in Guangdong Province, China, which is accounted for under the equity method of accounting. The total carrying value of the investment recorded at September 30, 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.

 

 

Note  4.

Inventories

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

 

 

 

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

 

 

 

Note  5.

Property, Plant and Equipment

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

 

 

 

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

 

 

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  6.

Goodwill and Other Intangible Assets

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

 

 

 

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

 

 

9


 

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):

 

Year Ending June 30,

 

 

 

 

 

 

Remaining 2016

 

 

 

$

9,226

 

2017

 

 

 

 

11,607

 

2018

 

 

 

 

11,139

 

2019

 

 

 

 

10,706

 

2020

 

 

 

 

10,593

 

 

 

Note  7.

Debt

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

 

 

September 30,

 

 

June 30,

 

 

2015

 

 

2015

 

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

$

100,000

 

 

$

108,500

 

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

 

60,000

 

 

 

65,000

 

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

 

2,493

 

 

 

2,457

 

Total debt

 

162,493

 

 

 

175,957

 

Current portion of long-term debt

 

(20,000

)

 

 

(20,000

)

Long-term debt, less current portion

$

142,493

 

 

$

155,957

 

 

 

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

10


 

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

 

 

 

Note  8.

Income Taxes

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.

 

 

11


 

Note  9.

Earnings Per Share  

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

 

 

 

Note  10.

Segment Reporting

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.

12


 

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

 

 

-