10-Q 1 iivi-10q_20160331.htm 10-Q iivi-10q_20160331.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 March 31, 2016

¨

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                      to                     .

Commission File Number: 0-16195

 

II-VI INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

PENNSYLVANIA

 

25-1214948

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

375 Saxonburg Boulevard

 

 

Saxonburg, PA

 

16056

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: 724-352-4455

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

x

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨  

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At May 4, 2016, 61,688,986 shares of Common Stock, no par value, of the registrant were outstanding.

 

 

 

 

 


II-VI INCORPORATED

INDEX

 

 

 

Page No.

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – March 31, 2016 and June 30, 2015 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings – Three and nine months ended March 31, 2016 and 2015 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Three and nine months ended March 31, 2016 and 2015 (Unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Nine months ended March 31, 2016 and 2015 (Unaudited)

 

7

 

 

 

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity – Nine months ended March 31, 2016 (Unaudited)

 

8

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

31

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

31

 

 

 

 

 

Item 1A.

 

Risk Factors

 

32

 

 

 

 

 

Item 2.

 

Issuer Purchases of Equity Securities

 

32

 

 

 

 

 

Item 6.

 

Exhibits

 

33

 

 

 

2


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)

 

 

 

March 31,

 

 

June 30,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

187,373

 

 

$

173,634

 

Accounts receivable - less allowance for doubtful accounts of $1,715 at March 31, 2016 and $1,048 at June 30, 2015

 

 

148,648

 

 

 

140,772

 

Inventories

 

 

181,788

 

 

 

164,388

 

Deferred income taxes

 

 

-

 

 

 

13,260

 

Prepaid and refundable income taxes

 

 

7,650

 

 

 

6,881

 

Prepaid and other current assets

 

 

14,927

 

 

 

14,033

 

Total Current Assets

 

 

540,386

 

 

 

512,968

 

Property, plant & equipment, net

 

 

253,142

 

 

 

203,812

 

Goodwill

 

 

239,337

 

 

 

195,894

 

Other intangible assets, net

 

 

156,253

 

 

 

122,462

 

Investment

 

 

12,567

 

 

 

11,914

 

Deferred income taxes

 

 

11,406

 

 

 

2,210

 

Other assets

 

 

9,304

 

 

 

8,904

 

Total Assets

 

$

1,222,395

 

 

$

1,058,164

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20,000

 

 

$

20,000

 

Accounts payable

 

 

47,545

 

 

 

45,275

 

Accrued compensation and benefits

 

 

45,154

 

 

 

39,310

 

Accrued income taxes payable

 

 

7,729

 

 

 

9,310

 

Deferred income taxes

 

 

-

 

 

 

685

 

Other accrued liabilities

 

 

27,468

 

 

 

24,576

 

Total Current Liabilities

 

 

147,896

 

 

 

139,156

 

Long-term debt

 

 

242,871

 

 

 

155,957

 

Deferred income taxes

 

 

21,195

 

 

 

7,105

 

Other liabilities

 

 

32,240

 

 

 

26,865

 

Total Liabilities

 

 

444,202

 

 

 

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 - 72,672,701 shares at March 31, 2016; 71,779,704 shares at June 30, 2015

 

 

242,033

 

 

 

226,609

 

Accumulated other comprehensive income (loss)

 

 

(312

)

 

 

8,665

 

Retained earnings

 

 

638,445

 

 

 

587,302

 

 

 

 

880,166

 

 

 

822,576

 

Treasury stock, at cost - 11,069,029 shares at March 31, 2016 and 10,565,209 shares at June 30, 2015

 

 

(101,973

)

 

 

(93,495

)

Total Shareholders' Equity

 

 

778,193

 

 

 

729,081

 

Total Liabilities and Shareholders' Equity

 

$

1,222,395

 

 

$

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

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

74,884

 

 

$

68,233

 

International

 

 

130,221

 

 

 

114,476

 

Total Revenues

 

 

205,105

 

 

 

182,709

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

127,436

 

 

 

116,984

 

Internal research and development

 

 

14,946

 

 

 

12,874

 

Selling, general and administrative

 

 

43,333

 

 

 

35,192

 

Interest expense

 

 

769

 

 

 

844

 

Other expense (income), net

 

 

1,257

 

 

 

1,534

 

Total Costs, Expenses and Other Expense (Income)

 

 

187,741

 

 

 

167,428

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

17,364

 

 

 

15,281

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

2,426

 

 

 

773

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

14,938

 

 

$

14,508

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

$

0.24

 

 

$

0.24

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

$

0.24

 

 

$

0.23

 

 

- See notes to condensed consolidated financial statements.

4


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Earnings (Unaudited)

($000 except per share data)

 

 

 

Nine Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

219,812

 

 

$

198,909

 

International

 

 

365,934

 

 

 

346,369

 

Total Revenues

 

 

585,746

 

 

 

545,278

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

365,544

 

 

 

348,676

 

Internal research and development

 

 

40,252

 

 

 

38,662

 

Selling, general and administrative

 

 

117,051

 

 

 

104,354

 

Interest expense

 

 

2,015

 

 

 

3,086

 

Other expense (income), net

 

 

(794

)

 

 

(6,079

)

Total Costs, Expenses and Other Expense (Income)

 

 

524,068

 

 

 

488,699

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

61,678

 

 

 

56,579

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

10,535

 

 

 

7,673

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

51,143

 

 

$

48,906

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

$

0.83

 

 

$

0.80

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

$

0.81

 

 

$

0.78

 

 

- See notes to condensed consolidated financial statements.

 

5


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

($000)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

14,938

 

 

$

14,508

 

 

$

51,143

 

 

$

48,906

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

4,553

 

 

 

(7,343

)

 

 

(9,009

)

 

 

(11,509

)

Pension adjustment, net of taxes of ($5) and $9 for the three and nine months ended March 31, 2016, respectively, and ($6) and $101 for the three and nine months ended March 31, 2015, respectively

 

 

(17

)

 

 

22

 

 

 

32

 

 

 

(380

)

Comprehensive income

 

$

19,474

 

 

$

7,187

 

 

$

42,166

 

 

$

37,017

 

 

- See notes to condensed consolidated financial statements.

 

6


II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

($000)

 

 

 

Nine Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net earnings

 

$

51,143

 

 

$

48,906

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

32,613

 

 

 

30,259

 

Amortization

 

 

9,172

 

 

 

8,983

 

Share-based compensation expense

 

 

8,516

 

 

 

8,586

 

Impairment of intangible assets

 

 

-

 

 

 

1,962

 

Loss on foreign currency remeasurements and transactions

 

 

586

 

 

 

1,892

 

Earnings from equity investment

 

 

(653

)

 

 

(707

)

Deferred income taxes

 

 

(1,193

)

 

 

(2,104

)

Excess tax benefits from share-based compensation expense

 

 

(96

)

 

 

(404

)

Increase (decrease) in cash excluding the effect of the purchase of acquisitions from changes in :

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,548

)

 

 

(5,972

)

Inventories

 

 

(8,950

)

 

 

(5,721

)

Accounts payable

 

 

(337

)

 

 

(3,625

)

Income taxes

 

 

(2,628

)

 

 

677

 

Other operating net assets

 

 

(2,389

)

 

 

2,971

 

Net cash provided by operating activities

 

 

81,236

 

 

 

85,703

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant & equipment

 

 

(32,743

)

 

 

(40,163

)

Purchases of businesses, net of cash acquired

 

 

(118,657

)

 

 

-

 

Proceeds from sale of property, plant & equipment

 

 

92

 

 

 

64

 

Net cash used in investing activities

 

 

(151,308

)

 

 

(40,099

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

125,200

 

 

 

3,000

 

Payments on borrowings

 

 

(38,500

)

 

 

(56,500

)

Purchases of treasury stock

 

 

(6,284

)

 

 

(12,729

)

Payments on holdback arrangements

 

 

-

 

 

 

(2,350

)

Proceeds from exercises of stock options

 

 

7,444

 

 

 

4,058

 

Other financing activities

 

 

(1,887

)

 

 

(610

)

Net cash provided by (used in) financing activities

 

 

85,973

 

 

 

(65,131

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(2,162

)

 

 

(430

)

Net increase (decrease) in cash and cash equivalents

 

 

13,739

 

 

 

(19,957

)

Cash and Cash Equivalents at Beginning of Period

 

 

173,634

 

 

 

174,660

 

Cash and Cash Equivalents at End of Period

 

$

187,373

 

 

$

154,703

 

Cash paid for interest

 

$

1,859

 

 

$

3,081

 

Cash paid for income taxes

 

$

13,378

 

 

$

9,025

 

Non-cash transactions:

 

 

 

 

 

 

 

 

Purchase of business utilizing earnout consideration recorded in other current liabilities

 

$

2,000

 

 

$

-

 

Purchase of business utilizing earnout consideration recorded in long-term  liabilities

 

$

4,000

 

 

$

-

 

 

- 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

 

 

880

 

 

 

7,444

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,444

 

Shares acquired in satisfaction of minimum tax withholding

   obligations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(110

)

 

 

(1,981

)

 

 

(1,981

)

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

51,143

 

 

 

-

 

 

 

-

 

 

 

51,143

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(381

)

 

 

(6,284

)

 

 

(6,284

)

Treasury stock under deferred compensation arrangements

 

 

13

 

 

 

213

 

 

 

-

 

 

 

-

 

 

 

(13

)

 

 

(213

)

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

(9,009

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(9,009

)

Share-based compensation expense

 

 

-

 

 

 

8,516

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,516

 

Pension adjustment, net of taxes of $9

 

 

-

 

 

 

-

 

 

 

32

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

32

 

Tax deficiency from share-based compensation expense

 

 

-

 

 

 

(749

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(749

)

Balance - March 31, 2016

 

 

72,673

 

 

$

242,033

 

 

$

(312

)

 

$

638,445

 

 

 

(11,069

)

 

$

(101,973

)

 

$

778,193

 

 

- See notes to condensed consolidated financial statements.

 

 

 

8


II-VI Incorporated and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note  1.

Basis of Presentation

The condensed consolidated financial statements of II-VI Incorporated (“II-VI” or the “Company”) for the three and nine months ended March 31, 2016 and 2015 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 nine months ended March 31, 2016 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 March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, and classification in the statement of cash flows. The standard will be effective for the Company’s 2017 fiscal year. Early adoption is permitted. The Company is evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires that a lessee recognize leased assets with terms greater than 12 months on the balance sheet for the rights and obligations created by those leases. The standard will be effective for the Company’s 2019 fiscal year. Early adoption is permitted. The Company is evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.

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.

9


 

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 the Company’s 2017 fiscal year. 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 update will be effective for the Company’s 2017 fiscal year. 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 the Company’s 2017 fiscal year. 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 the Company’s  2019 fiscal year. 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.

Acquisitions

EpiWorks, Inc.

In February 2016, the Company acquired all the outstanding shares of EpiWorks, Inc. (“EpiWorks”) a privately held company based in Illinois. Under the terms of the merger agreement, the consideration consisted of initial cash paid at the acquisition date of $43.0 million, net of cash acquired and a working capital adjustment of $0.2 million. In addition, the agreement provides up to a maximum of $6.0 million of additional cash earnout opportunities based upon EpiWorks achieving certain agreed upon financial and operational targets for capacity, wafer output and gross margin, which if earned would be payable $2.0 million for the achievement of each specific target over the next three years. EpiWorks develops and manufactures compound semiconductor epitaxial wafers for applications in optical components, wireless devices and high-speed communication systems. EpiWorks is a business unit of the Company’s II-VI Laser Solutions operating segment for financial reporting purposes. Due to the timing of the acquisition, the Company is still in the process of completing its fair market valuation, including the valuation of certain tangible and intangible assets, earnout opportunities, as well as deferred income taxes.

The following table presents the allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition ($000):

 

Net cash paid at acquisition

 

$

42,981

 

Cash paid for working capital adjustment

 

 

163

 

Fair value of cash earnout arrangement

 

 

6,000

 

Purchase price

 

$

49,144

 

10


 

 

The following table presents the preliminary allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition, as the Company intends to finalize its accounting for the acquisition of EpiWorks within one year from the date of acquisition ($000):

 

Assets

 

 

 

 

Accounts receivable

 

$

2,121

 

Inventories

 

 

2,435

 

Prepaid and other assets

 

 

68

 

Property, plant & equipment

 

 

9,184

 

Intangible assets

 

 

19,911

 

Goodwill

 

 

24,133

 

Total assets acquired

 

$

57,852

 

 

 

 

 

 

Liabilities

 

 

 

 

Accounts payable

 

$

605

 

Other accrued liabilities

 

 

859

 

Deferred tax liabilities

 

 

7,244

 

Total liabilities assumed

 

 

8,708

 

Net assets acquired

 

$

49,144

 

The goodwill of $24.1 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the assembled workforce of EpiWorks. None of the goodwill is deductible for income tax purposes. The fair value of accounts receivable acquired was $2.1 million with the gross contractual amount being $2.1 million. At the time of acquisition, the Company expected to collect all of the accounts receivable.

The amount of revenues and net loss of EpiWorks included in the Company’s Consolidated Statement of Earnings were $1.0 million and $1.2 million, respectively, for the three and nine months ended March 31, 2016.

 

ANADIGICS, Inc.

In March 2016, the Company acquired all the outstanding shares of ANADIGICS, Inc. (Nasdaq:ANAD) (“ANADIGICS”) a publicly traded company based in New Jersey. Under the terms of the merger agreement, the consideration consisted of cash paid at the acquisition date of $75.5 million, net of cash acquired of $2.7 million. ANADIGICS has a 6-inch gallium arsenide wafer fabrication capability allowing for the production of high performance lasers and integrated circuits in high volume.  In addition, ANADIGICS designs and manufactures innovative radio frequency (RF) solutions for CATV infrastructure, small-cell, WIFI and cellular markets. ANADIGICS is a business unit of the Company’s II-VI Laser Solutions operating segment for financial reporting purposes. Due to the timing of the acquisition, the Company is still in the process of completing its fair market valuation, including the valuation of certain tangible and intangible assets as well as deferred income taxes.  

11


 

The following table presents the preliminary allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition as the Company intends to finalize its accounting for the acquisition of ANADIGICS within one year from the date of acquisition ($000):

 

Assets

 

 

 

 

Accounts receivable

 

$

3,973

 

Inventories

 

 

8,322

 

Prepaid and other assets

 

 

2,347

 

Property, plant & equipment

 

 

41,500

 

Intangible assets

 

 

23,537

 

Goodwill

 

 

21,060

 

Total assets acquired

 

$

100,739

 

 

 

 

 

 

Liabilities

 

 

 

 

Accounts payable

 

$

3,586

 

Other accrued liabilities

 

 

10,726

 

Deferred tax liabilities

 

 

10,915

 

Total liabilities assumed

 

 

25,227

 

Net assets acquired

 

$

75,512

 

The goodwill of $21.1 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the assembled workforce of ANADIGICS. None of the goodwill is deductible for income tax purposes. The fair value of accounts receivable acquired was $4.0 million with the gross contractual amount being $4.0 million. At the time of acquisition, the Company expected to collect all of the accounts receivable.

The amount of revenues and net loss of ANADIGICS included in the Company’s Consolidated Statement of Earnings were $3.2 million and $2.9 million, respectively, for the three and nine months ended March 31, 2016.

Deferred Income Taxes

In connection with above acquisitions, the Company recorded a valuation allowance of $29.0 million against the U.S. net deferred income tax assets as part of the preliminary purchase price allocation.  The Company’s policy is to allocate the available sources of future taxable income first to the Company’s existing deferred tax assets before considering acquired deferred tax assets.

Pro Forma Information

The following unaudited pro forma consolidated results of operations for the three and nine months ended March 31, 2016 and 2015 have been prepared as if the acquisitions of EpiWorks and ANADIGICS had occurred on July 1, 2014, the beginning of the Company’s fiscal year 2015, which is the fiscal year prior to the acquisitions. As a result, certain transaction related expenses of $2.8 million and $3.1 million, respectively, (net of tax) recorded in Selling, general and administrative in the Company’s Condensed Consolidated Statement of Earnings for the three and nine months ended March 31, 2016 were only included in the earliest period presented below ($000 except per share data).

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net revenues

 

$

213,711

 

 

$

204,764

 

 

$

624,879

 

 

$

614,927

 

Net earnings (loss)

 

$

6,740

 

 

$

7,349

 

 

$

26,126

 

 

$

21,609

 

Basic earnings per share

 

$

0.11

 

 

$

0.12

 

 

$

0.43

 

 

$

0.35

 

Diluted earnings per share

 

$

0.11

 

 

$

0.12

 

 

$

0.42

 

 

$

0.35

 

12


 

 

The pro forma results are not necessarily indicative of what actually would have occurred if the transactions had occurred as described above. The pro forma results are not intended to be a projection of future results and do not reflect any cost savings that might be achieved from the combined operations.

 

 

Note  4.

Investment

The Company has an equity investment of 20.2% in Guangdong Fuxin Electronic Technology (“Fuxin”) based in Guangdong Province, China, which is accounted for under the equity method of accounting. The total carrying value of the investment recorded at March 31, 2016 and June 30, 2015 was $12.6 million and $11.9 million, respectively. During each of the three months ended March 31, 2016 and 2015, the Company’s pro-rata share of earnings from this investment was $0.2 million, and was $0.6 million and $0.7 million during the nine months ended March 31, 2016 and 2015, respectively, and was recorded in Other expense (income), net in the Condensed Consolidated Statements of Earnings.

 

 

Note  5.

Inventories

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

 

 

 

March 31,

 

 

June 30,

 

 

 

2016

 

 

2015

 

Raw materials

 

$

73,570

 

 

$

71,210

 

Work in progress

 

 

58,903

 

 

 

52,726

 

Finished goods

 

 

49,315

 

 

 

40,452

 

 

 

$

181,788

 

 

$

164,388

 

 

 

Note  6.

Property, Plant and Equipment

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

 

 

 

March 31,

 

 

June 30,

 

 

 

2016

 

 

2015

 

Land and improvements

 

$

5,038

 

 

$

4,566

 

Buildings and improvements

 

 

100,300

 

 

 

91,171

 

Machinery and equipment

 

 

422,572

 

 

 

366,560

 

Construction in progress

 

 

31,458

 

 

 

17,749

 

 

 

 

559,368

 

 

 

480,046

 

Less accumulated depreciation

 

 

(306,226

)

 

 

(276,234

)

 

 

$

253,142

 

 

$

203,812

 

During the quarter ended March 31, 2016, the Company’s one year timeframe to sell its manufacturing facility in New Port Ritchey, Florida under U.S. GAAP accounting for assets held for sale expired. The Company reclassified the carrying value of the land and building of approximately $1.2 million from Prepaid and other current assets to Property, plant and equipment in the Condensed Consolidated Balance Sheet at March 31, 2016. The Company cumulatively adjusted suspended depreciation for the period in which the asset was classified as held for sale. The depreciation adjustment was insignificant.

 

 

13


 

Note  7.

Goodwill and Other Intangible Assets  

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

 

 

 

Nine Months Ended March 31, 2016

 

 

 

II-VI Laser

 

 

II-VI

 

 

II- VI Performance

 

 

 

 

 

 

 

Solutions

 

 

Photonics

 

 

Products

 

 

Total

 

Balance-beginning of period

 

$

43,578

 

 

$

99,426

 

 

$

52,890

 

 

$

195,894

 

Goodwill acquired

 

 

45,193

 

 

 

-

 

 

 

-

 

 

 

45,193

 

Foreign currency translation

 

 

49

 

 

 

(1,799

)

 

 

-

 

 

 

(1,750

)

Balance-end of period

 

$

88,820

 

 

$

97,627

 

 

$

52,890

 

 

$

239,337

 

 

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 March 31, 2016.

 

In connection with the acquisitions of EpiWorks and ANADIGICS in February 2016 and March 2016, respectively, the Company recorded the excess purchase price over the net assets of the businesses acquired as goodwill in the accompanying Condensed Consolidated Balance Sheet based on preliminary purchase price allocations.

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of March 31, 2016 and June 30, 2015 were as follows ($000):

 

 

 

March 31, 2016

 

 

June 30, 2015

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

60,330

 

 

$

(21,747

)

 

$

38,583

 

 

$

50,520

 

 

$

(18,838

)

 

$

31,682

 

Trademarks

 

 

15,968

 

 

 

(1,176

)

 

 

14,792

 

 

 

15,869

 

 

 

(1,111

)

 

 

14,758

 

Customer Lists

 

 

134,925

 

 

 

(32,180

)

 

 

102,745

 

 

 

102,489

 

 

 

(26,583

)

 

 

75,906

 

Other

 

 

1,616

 

 

 

(1,483

)

 

 

133

 

 

 

1,572

 

 

 

(1,456

)

 

 

116

 

Total

 

$

212,839

 

 

$

(56,586

)

 

$

156,253

 

 

$

170,450

 

 

$