10-Q 1 iivi-10q_20151231.htm 10-Q iivi-10q_20151231.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 December 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 February 4, 2016, 61,259,112 shares of Common Stock, no par value, of the registrant were outstanding.

 

 

 

 

 


II-VI INCORPORATED

INDEX

 

 

 

Page No.

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – December 31, 2015 and June 30, 2015 (Unaudited)

 

3

 

 

 

 

 

 

 

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

 

4

 

 

 

 

 

 

 

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

 

6

 

 

 

 

 

 

 

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

 

7

 

 

 

 

 

 

 

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

 

19

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

28

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

28

 

 

 

 

 

Item 1A.

 

Risk Factors

 

28

 

 

 

 

 

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)

 

 

 

December 31,

 

 

June 30,

 

 

 

2015

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

177,084

 

 

$

173,634

 

Accounts receivable - less allowance for doubtful accounts of $1,766 at December 31, 2015 and $1,048 at June 30, 2015

 

 

128,260

 

 

 

140,772

 

Inventories

 

 

167,928

 

 

 

164,388

 

Deferred income taxes

 

 

-

 

 

 

13,260

 

Prepaid and refundable income taxes

 

 

8,355

 

 

 

6,881

 

Prepaid and other current assets

 

 

13,999

 

 

 

14,033

 

Total Current Assets

 

 

495,626

 

 

 

512,968

 

Property, plant & equipment, net

 

 

200,563

 

 

 

203,812

 

Goodwill

 

 

193,874

 

 

 

195,894

 

Other intangible assets, net

 

 

115,939

 

 

 

122,462

 

Investment

 

 

12,343

 

 

 

11,914

 

Deferred income taxes

 

 

16,099

 

 

 

2,210

 

Other assets

 

 

9,001

 

 

 

8,904

 

Total Assets

 

$

1,043,445

 

 

$

1,058,164

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20,000

 

 

$

20,000

 

Accounts payable

 

 

38,824

 

 

 

45,275

 

Accrued compensation and benefits

 

 

37,457

 

 

 

39,310

 

Accrued income taxes payable

 

 

10,783

 

 

 

9,310

 

Deferred income taxes

 

 

-

 

 

 

685

 

Other accrued liabilities

 

 

23,829

 

 

 

24,576

 

Total Current Liabilities

 

 

130,893

 

 

 

139,156

 

Long-term debt

 

 

126,491

 

 

 

155,957

 

Deferred income taxes

 

 

6,303

 

 

 

7,105

 

Other liabilities

 

 

27,732

 

 

 

26,865

 

Total Liabilities

 

 

291,419

 

 

 

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 - 72,289,968 shares at December 31, 2015; 71,779,704 shares at June 30, 2015

 

 

235,342

 

 

 

226,609

 

Accumulated other comprehensive income (loss)

 

 

(4,848

)

 

 

8,665

 

Retained earnings

 

 

623,507

 

 

 

587,302

 

 

 

 

854,001

 

 

 

822,576

 

Treasury stock, at cost - 11,069,110 shares at December 31, 2015 and 10,565,209 shares at June 30, 2015

 

 

(101,975

)

 

 

(93,495

)

Total Shareholders' Equity

 

 

752,026

 

 

 

729,081

 

Total Liabilities and Shareholders' Equity

 

$

1,043,445

 

 

$

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

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

74,177

 

 

$

68,695

 

International

 

 

117,257

 

 

 

108,041

 

Total Revenues

 

 

191,434

 

 

 

176,736

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

120,090

 

 

 

113,718

 

Internal research and development

 

 

12,155

 

 

 

12,845

 

Selling, general and administrative

 

 

37,408

 

 

 

33,642

 

Interest expense

 

 

597

 

 

 

1,038

 

Other expense (income), net

 

 

(994

)

 

 

(9,295

)

Total Costs, Expenses and Other Expense (Income)

 

 

169,256

 

 

 

151,948

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

22,178

 

 

 

24,788

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

3,187

 

 

 

2,692

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

18,991

 

 

$

22,096

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

$

0.31

 

 

$

0.36

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

$

0.30

 

 

$

0.35

 

 

- See notes to condensed consolidated financial statements.

4


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Earnings (Unaudited)

($000 except per share data)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

144,928

 

 

$

130,676

 

International

 

 

235,713

 

 

 

231,893

 

Total Revenues

 

 

380,641

 

 

 

362,569

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

238,108

 

 

 

231,692

 

Internal research and development

 

 

25,306

 

 

 

25,788

 

Selling, general and administrative

 

 

73,718

 

 

 

69,162

 

Interest expense

 

 

1,246

 

 

 

2,242

 

Other expense (income), net

 

 

(2,051

)

 

 

(7,613

)

Total Costs, Expenses and Other Expense (Income)

 

 

336,327

 

 

 

321,271

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

44,314

 

 

 

41,298

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

8,109

 

 

 

6,900

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

36,205

 

 

$

34,398

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

$

0.59

 

 

$

0.56

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

$

0.58

 

 

$

0.55

 

 

- See notes to condensed consolidated financial statements.

 

5


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

($000)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

18,991

 

 

$

22,096

 

 

$

36,205

 

 

$

34,398

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(5,411

)

 

 

(1,491

)

 

 

(13,562

)

 

 

(4,166

)

Pension adjustment, net of taxes of $4 and $14 for the three and six months ended December 31, 2015, respectively, and $50 and $107 for the three and six months ended December 31, 2014, respectively

 

 

13

 

 

 

(98

)

 

 

49

 

 

 

(402

)

Comprehensive income

 

$

13,593

 

 

$

20,507

 

 

$

22,692

 

 

$

29,830

 

 

- See notes to condensed consolidated financial statements.

 

6


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

($000)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net earnings

 

$

36,205

 

 

$

34,398

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

21,166

 

 

 

20,642

 

Amortization

 

 

5,958

 

 

 

5,990

 

Share-based compensation expense

 

 

6,949

 

 

 

5,955

 

(Gain) loss on foreign currency remeasurements and transactions

 

 

(951

)

 

 

1,611

 

Earnings from equity investment

 

 

(429

)

 

 

(516

)

Deferred income taxes

 

 

(3,788

)

 

 

(621

)

Excess tax benefits from share-based compensation expense

 

 

(112

)

 

 

(103

)

Increase (decrease) in cash from changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

10,520

 

 

 

(4,675

)

Inventories

 

 

(7,833

)

 

 

(4,892

)

Accounts payable

 

 

(5,167

)

 

 

(5,662

)

Income taxes

 

 

2,540

 

 

 

1,456

 

Other operating net assets

 

 

(2,758

)

 

 

(4,139

)

Net cash provided by operating activities

 

 

62,300

 

 

 

49,444

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant & equipment

 

 

(19,156

)

 

 

(31,609

)

Proceeds from sale of property, plant & equipment

 

 

39

 

 

 

101

 

Net cash used in investing activities

 

 

(19,117

)

 

 

(31,508

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

4,000

 

 

 

3,000

 

Payments on borrowings

 

 

(33,500

)

 

 

(32,000

)

Purchases of treasury stock

 

 

(6,284

)

 

 

(11,301

)

Proceeds from exercises of stock options

 

 

1,794

 

 

 

2,042

 

Other financing activities

 

 

(1,861

)

 

 

(894

)

Net cash used in financing activities

 

 

(35,851

)

 

 

(39,153

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(3,882

)

 

 

1,506

 

Net increase (decrease) in cash and cash equivalents

 

 

3,450

 

 

 

(19,711

)

Cash and Cash Equivalents at Beginning of Period

 

 

173,634

 

 

 

174,660

 

Cash and Cash Equivalents at End of Period

 

$

177,084

 

 

$

154,949

 

Cash paid for interest

 

$

1,226

 

 

$

2,229

 

Cash paid for income taxes

 

$

8,497

 

 

$

6,239

 

 

- 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 (Loss)

 

 

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

 

 

497

 

 

 

1,794

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,794

 

Shares acquired in satisfaction of minimum tax withholding

   obligations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(110

)

 

 

(1,981

)

 

 

(1,981

)

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

36,205

 

 

 

-

 

 

 

-

 

 

 

36,205

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(381

)

 

 

(6,284

)

 

 

(6,284

)

Treasury stock under deferred compensation arrangements

 

 

13

 

 

 

215

 

 

 

-

 

 

 

-

 

 

 

(13

)

 

 

(215

)

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

(13,562

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13,562

)

Share-based compensation expense

 

 

-

 

 

 

6,949

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,949

 

Pension adjustment, net of taxes of $14

 

 

-

 

 

 

-

 

 

 

49

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

49

 

Tax deficiency from share-based compensation expense

 

 

-

 

 

 

(225

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(225

)

Balance - December 31, 2015

 

 

72,290

 

 

$

235,342

 

 

$

(4,848

)

 

$

623,507

 

 

 

(11,069

)

 

$

(101,975

)

 

$

752,026

 

 

- See notes to condensed consolidated financial statements.

 

 

 

8


II-VI Incorporated and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note  1.

Basis of Presentation

The condensed consolidated financial statements of II-VI Incorporated (“II-VI” or the “Company”) for the three and six months ended December 31, 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 and six months ended December 31, 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

Adopted Pronouncements

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This update requires all deferred tax assets and liabilities, and any related valuation allowance, to be classified as noncurrent on the balance sheet. The classification change for all deferred taxes as noncurrent simplifies the Company’s processes as it eliminates the need to separately identify the net current and net noncurrent deferred tax asset or liability in each jurisdiction and allocate valuation allowances. The Company has elected to prospectively adopt the accounting standard in the quarter ended December 31, 2015. The adoption of this standard resulted in the reclassification of $13.3 million from current Deferred income tax assets in the Consolidated Balance Sheet as of December 31, 2015 to noncurrent Deferred income tax assets and $1.0 million from current Deferred income tax liabilities to noncurrent Deferred income tax liabilities. Prior periods in the Company’s Consolidated Financial Statements were not retrospectively adjusted.  

Pronouncements Currently Under Evaluation

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The standard will be effective for the Company’s 2017 fiscal year. Early adoption is permitted. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

In July 2015, the FASB issued 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. 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 2015-03, Interest – Imputation of Interest (Subtopic 835-30): 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.

9


 

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.

 

 

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 December 31, 2015 and June 30, 2015 was $12.3 million and $11.9 million, respectively. During each of the three months ended December 31, 2015 and 2014, the Company’s pro-rata share of earnings from this investment was $0.2 million, and was $0.4 million and $0.5 million during the six months ended December 31, 2015 and 2014, respectively, 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):

 

 

 

December 31,

 

 

June 30,

 

 

 

2015

 

 

2015

 

Raw materials

 

$

67,795

 

 

$

71,210

 

Work in progress

 

 

55,805

 

 

 

52,726

 

Finished goods

 

 

44,328

 

 

 

40,452

 

 

 

$

167,928

 

 

$

164,388

 

 

 

Note  5.

Property, Plant and Equipment

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

 

 

 

December 31,

 

 

June 30,

 

 

 

2015

 

 

2015

 

Land and improvements

 

$

4,619

 

 

$

4,566

 

Buildings and improvements

 

 

91,620

 

 

 

91,171

 

Machinery and equipment

 

 

371,378

 

 

 

366,560

 

Construction in progress

 

 

24,333

 

 

 

17,749

 

 

 

 

491,950

 

 

 

480,046

 

Less accumulated depreciation

 

 

(291,387

)

 

 

(276,234

)

 

 

$

200,563

 

 

$

203,812

 

During the quarter ended March 31, 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 of the plan implementation, 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.

 

 

10


 

Note  6.

Goodwill and Other Intangible Assets  

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

 

 

 

Six Months Ended December 31, 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

 

 

(63

)

 

 

(1,957

)

 

 

-

 

 

 

(2,020

)

Balance-end of period

 

$

43,515

 

 

$

97,469

 

 

$

52,890

 

 

$

193,874

 

 

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 December 31, 2015.

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

 

 

 

December 31, 2015

 

 

June 30, 2015

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

49,933

 

 

$

(20,556

)

 

$

29,377

 

 

$

50,520

 

 

$

(18,838

)

 

$

31,682

 

Trademarks

 

 

15,663

 

 

 

(1,148

)

 

 

14,515

 

 

 

15,869

 

 

 

(1,111

)

 

 

14,758

 

Customer Lists

 

 

101,988

 

 

 

(30,039

)

 

 

71,949

 

 

 

102,489

 

 

 

(26,583

)

 

 

75,906

 

Other

 

 

1,570

 

 

 

(1,472

)

 

 

98

 

 

 

1,572

 

 

 

(1,456

)

 

 

116

 

Total

 

$

169,154

 

 

$

(53,215

)

 

$

115,939

 

 

$

170,450

 

 

$

(47,988

)

 

$

122,462

 

 

Amortization expense recorded on the Company’s intangible assets was $3.0 million and $6.0 million for the three and six months ended December 31, 2015, respectively, and was $2.9 million and $6.0 million for the three and six months ended December 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 104 months. The customer lists are being amortized over a range of approximately 120 to 240 months with a weighted average remaining life of approximately 135 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 December 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 2016

 

$

5,804

 

2017

 

 

11,607

 

2018

 

 

11,067

 

2019

 

 

10,706

 

2020

 

 

10,313

 

 

 

11


 

Note  7.

Debt  

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

 

 

 

December 31,

 

 

June 30,

 

 

 

2015

 

 

2015

 

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

 

$

89,000

 

 

$

108,500

 

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

 

 

55,000

 

 

 

65,000

 

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

 

 

2,491

 

 

 

2,457

 

Total debt

 

 

146,491

 

 

 

175,957

 

Current portion of long-term debt

 

 

(20,000

)

 

 

(20,000

)

Long-term debt, less current portion

 

$

126,491

 

 

$

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. Amounts borrowed under the revolving credit facility are 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 10, 2018 and has an interest rate of either a Base Rate Option or a Euro-Rate Option, plus an Applicable Margin, as defined in the agreement governing the Credit Facility. If the Base Rate option is selected for a borrowing, the Applicable Margin is 0.00% to 0.075% and if the Euro-Rate Option is selected for a borrowing, the Applicable Margin is 0.75% to 1.75%. The Applicable Margin is based on the Company’s ratio of consolidated indebtedness to consolidated EBITDA. Additionally, the Credit Facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of December 31, 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 each of December 31, 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 December 31, 2015, the Company was in compliance with all financial covenants under its Yen facility.

The Company had aggregate availability of $136.1 million and $116.6 million under its lines of credit as of December 31, 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 December 31, 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 six months ended December 31, 2015 and 2014, respectively.

Remaining annual principal payments under the Company’s existing credit facilities as of December 31, 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

 

 

15,000

 

 

 

-

 

 

 

89,000

 

 

 

104,000

 

Year 4

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Year 5

 

 

-

 

 

 

2,491

 

 

 

-

 

 

 

2,491

 

Total

 

$

55,000

 

 

$

2,491

 

 

$

89,000

 

 

$

146,491

 

 

 

12


 

Note  8.

Income Taxes  

The Company’s year-to-date effective income tax rate at December 31, 2015 and 2014 was 18.3% and 16.4%, 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 December 31, 2015 and June 30, 2015, the Company’s gross unrecognized income tax benefit was $5.1 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 December 31, 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 $5.1 million and $4.0 million of gross unrecognized income tax benefit at December 31, 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 by the Federal Central Tax Office in Germany.

 

 

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 193,000 and 212,000 for the three and six months ended December 31, 2015, respectively, and 976,000 and 927,000 for the three and six months ended December 31, 2014, respectively ($000 except per share data):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net earnings

 

$

18,991

 

 

$

22,096

 

 

$

36,205

 

 

$

34,398

 

Divided by:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares

 

 

61,165

 

 

 

61,129

 

 

 

61,194