10-Q 1 iivi-10q_20160930.htm FORM 10-Q iivi-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 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      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      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

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  

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

At November 4, 2016, 62,279,166 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, 2016 and June 30, 2016 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings – Three months ended September 30, 2016 and 2015 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Three months ended September 30, 2016 and 2015 (Unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Three months ended September 30, 2016 and 2015 (Unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity – Three months ended  September 30, 2016 (Unaudited)

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

8

 

 

 

 

 

Item 2.

 

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

 

21

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

29

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

29

 

 

 

 

 

Item 1A.

 

Risk Factors

 

29

 

 

 

 

 

Item 2.

 

Issuer Purchases of Equity Securities

 

29

 

 

 

 

 

Item 6.

 

Exhibits

 

30

 

 

 

2


 

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)

 

 

 

September 30,

 

 

June 30,

 

 

 

2016

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

220,096

 

 

$

218,445

 

Accounts receivable - less allowance for doubtful accounts of $1,740 at September 30, 2016 and $2,016 at June 30, 2016

 

 

155,954

 

 

 

164,817

 

Inventories

 

 

182,647

 

 

 

175,133

 

Prepaid and refundable income taxes

 

 

5,807

 

 

 

6,535

 

Prepaid and other current assets

 

 

20,060

 

 

 

18,033

 

Total Current Assets

 

 

584,564

 

 

 

582,963

 

Property, plant & equipment, net

 

 

260,912

 

 

 

242,857

 

Goodwill

 

 

233,604

 

 

 

233,755

 

Other intangible assets, net

 

 

121,444

 

 

 

124,590

 

Investment

 

 

11,684

 

 

 

11,354

 

Deferred income taxes

 

 

6,568

 

 

 

7,848

 

Other assets

 

 

9,711

 

 

 

8,614

 

Total Assets

 

$

1,228,487

 

 

$

1,211,981

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20,000

 

 

$

20,000

 

Accounts payable

 

 

62,138

 

 

 

53,796

 

Accrued compensation and benefits

 

 

39,162

 

 

 

59,012

 

Accrued income taxes payable

 

 

11,382

 

 

 

12,588

 

Other accrued liabilities

 

 

21,544

 

 

 

25,846

 

Total Current Liabilities

 

 

154,226

 

 

 

171,242

 

Long-term debt

 

 

228,206

 

 

 

215,307

 

Deferred income taxes

 

 

11,734

 

 

 

11,103

 

Other liabilities

 

 

33,764

 

 

 

31,991

 

Total Liabilities

 

 

427,930

 

 

 

429,643

 

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 - 73,250,344 shares at September 30, 2016; 72,840,257 shares at June 30, 2016

 

 

249,447

 

 

 

243,812

 

Accumulated other comprehensive loss

 

 

(14,711

)

 

 

(14,017

)

Retained earnings

 

 

669,082

 

 

 

652,788

 

 

 

 

903,818

 

 

 

882,583

 

Treasury stock, at cost - 11,053,874 shares at September 30, 2016 and 10,965,925 shares at June 30, 2016

 

 

(103,261

)

 

 

(100,245

)

Total Shareholders' Equity

 

 

800,557

 

 

 

782,338

 

Total Liabilities and Shareholders' Equity

 

$

1,228,487

 

 

$

1,211,981

 

 

- 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,

 

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

69,318

 

 

$

70,751

 

International

 

 

152,202

 

 

 

118,456

 

Total Revenues

 

 

221,520

 

 

 

189,207

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

133,918

 

 

 

118,018

 

Internal research and development

 

 

21,832

 

 

 

13,151

 

Selling, general and administrative

 

 

42,079

 

 

 

36,310

 

Interest expense

 

 

1,246

 

 

 

649

 

Other expense (income), net

 

 

(1,402

)

 

 

(1,057

)

Total Costs, Expenses and Other Expense (Income)

 

 

197,673

 

 

 

167,071

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

23,847

 

 

 

22,136

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

7,553

 

 

 

4,922

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

16,294

 

 

$

17,214

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

0.26

 

 

$

0.28

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

0.26

 

 

$

0.27

 

 

- 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,

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

16,294

 

 

$

17,214

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(582

)

 

 

(8,151

)

Pension adjustment, net of taxes of ($52) and $10 for the three months ended, respectively

 

 

(112

)

 

 

36

 

Comprehensive income

 

$

15,600

 

 

$

9,099

 

 

- 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,

 

 

 

2016

 

 

2015

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net earnings

 

$

16,294

 

 

$

17,214

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

11,708

 

 

 

10,345

 

Amortization

 

 

3,174

 

 

 

2,960

 

Share-based compensation expense

 

 

3,073

 

 

 

4,009

 

Loss (gain) on foreign currency remeasurements and transactions

 

 

582

 

 

 

(712

)

Earnings from equity investment

 

 

(331

)

 

 

(264

)

Deferred income taxes

 

 

1,521

 

 

 

(360

)

Excess tax benefits from share-based compensation expense

 

 

(139

)

 

 

(30

)

Increase (decrease) in cash from changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

8,283

 

 

 

6,459

 

Inventories

 

 

(7,551

)

 

 

(5,489

)

Accounts payable

 

 

8,338

 

 

 

(5,073

)

Income taxes

 

 

166

 

 

 

766

 

Accrued compensation and benefits

 

 

(19,756

)

 

 

(7,183

)

Other operating net assets

 

 

(5,849

)

 

 

(463

)

Net cash provided by operating activities

 

 

19,513

 

 

 

22,179

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant & equipment

 

 

(29,994

)

 

 

(9,424

)

Other investing activities

 

 

145

 

 

 

25

 

Net cash used in investing activities

 

 

(29,849

)

 

 

(9,399

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

24,000

 

 

 

4,000

 

Payments on borrowings

 

 

(10,000

)

 

 

(17,500

)

Purchases of treasury stock

 

 

-

 

 

 

(5,884

)

Proceeds from exercises of stock options

 

 

1,745

 

 

 

766

 

Payments in satisfaction of employees' minimum tax obligations

 

 

(2,230

)

 

 

(1,680

)

Debt issuance costs

 

 

(1,384

)

 

 

-

 

Other financing activities

 

 

139

 

 

 

30

 

Net cash provided by (used in) financing activities

 

 

12,270

 

 

 

(20,268

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(283

)

 

 

(2,367

)

Net increase (decrease) in cash and cash equivalents

 

 

1,651

 

 

 

(9,855

)

Cash and Cash Equivalents at Beginning of Period

 

 

218,445

 

 

 

173,634

 

Cash and Cash Equivalents at End of Period

 

$

220,096

 

 

$

163,779

 

Cash paid for interest

 

$

1,092

 

 

$

657

 

Cash paid for income taxes

 

$

5,721

 

 

$

4,535

 

 

 

 

 

 

 

 

 

 

Non cash transactions:

 

 

 

 

 

 

 

 

Purchases of treasury stock recorded in Other accrued liabilities

 

$

-

 

 

$

400

 

 

- 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, 2016

 

 

72,840

 

 

$

243,812

 

 

$

(14,017

)

 

$

652,788

 

 

 

(10,966

)

 

$

(100,245

)

 

$

782,338

 

Shares issued under share-based compensation plans

 

 

373

 

 

 

1,745

 

 

 

-

 

 

 

-

 

 

 

(104

)

 

 

(2,230

)

 

 

(485

)

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

16,294

 

 

 

-

 

 

 

-

 

 

 

16,294

 

Treasury stock under deferred compensation arrangements

 

 

37

 

 

 

786

 

 

 

-

 

 

 

-

 

 

 

16

 

 

 

(786

)

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

(582

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(582

)

Share-based compensation expense

 

 

-

 

 

 

3,073

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,073

 

Pension adjustment, net of taxes of ($52)

 

 

-

 

 

 

-

 

 

 

(112

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(112

)

Net tax benefits from share-based compensation expense

 

 

-

 

 

 

31

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

31

 

Balance - September 30, 2016

 

 

73,250

 

 

$

249,447

 

 

$

(14,711

)

 

$

669,082

 

 

 

(11,054

)

 

$

(103,261

)

 

$

800,557

 

 

- 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, 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, 2016. The consolidated results of operations for the three months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full fiscal year. The June 30, 2016 Condensed Consolidated Balance Sheet information was derived from the Company’s audited financial statements.

Certain amounts from prior periods have been reclassified on the Condensed Consolidated Statements of Cash Flows to conform to the current year presentation relating to Accrued compensation and benefits in Net cash provided by operating activities and Payments in satisfaction of employees’ minimum tax obligations in Net cash provided by (used in) financing activities.

 

 

Note  2.

Recent Accounting Pronouncements

Adopted Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Company adopted ASU 2015-03, as clarified by ASU 2015-15, which did not have a material impact on the Company’s Consolidated Financial Statements other than corresponding reductions to total assets and total liabilities on the Condensed Consolidated Balance Sheets. Prior to adoption, the Company recorded deferred financing costs as Other assets on the Consolidated Balance Sheets. Upon adoption, the Company reclassified these costs as unamortized debt issuance costs that reduce long term debt on the consolidated balance sheet and retrospectively reclassified $0.6 million that were previously presented as deferred financing costs, an asset on the consolidated balance sheet as of June 30, 2016. There was no effect on the consolidated statements of operations as a result of the adoption.

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 adoption of this standard did not 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 adoption of this standard did not 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 adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.

Pronouncements Currently Under Evaluation

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in the update provide guidance on eight specific cash flow issues. The update 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 May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in the update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this update affect only narrow aspects of Topic 606. The update will be effective for the Company’s 2019 fiscal year. The Company is evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.

8


 

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 2018 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 eliminates the requirement to retrospectively apply the equity method as a result of an increase in the level of ownership interest. The ASU also requires unrealized holding gains or losses in accumulated other comprehensive income related to an available for sale security that becomes eligible for the equity method to be recognized in earnings when it qualifies for the equity method. The standard will be effective for the Company’s 2018 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 2020 fiscal year. Early adoption is permitted. The Company is evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Recognition and measurement of Financial Assets and Financial Liabilities (Topic 825). This update requires that public entities measure equity investments with readily determinable fair values, at fair value, with changes in their fair value recorded through net income. This ASU also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The standard will be effective for the Company’s 2018 fiscal year. The Company is evaluating the impact 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 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. The Company has not yet selected a transition method and is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements-Going Concern”. This update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The update is 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.

 

 

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 in the amount of $2.0 million for the achievement of each specific annual 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

9


 

business unit of the Company’s II-VI Laser Solutions operating segment for financial reporting purposes. The Company completed its valuation of the assets of EpiWorks during the quarter ended September 30, 2016.

The following table presents the purchase price 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

 

 

 

4,352

 

Purchase price

 

$

 

47,496

 

 

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

 

Assets

 

 

 

 

 

Accounts receivable

 

$

 

2,121

 

Inventories

 

 

 

2,435

 

Prepaid and other assets

 

 

 

68

 

Property, plant & equipment

 

 

 

9,043

 

Intangible assets

 

 

 

14,124

 

Goodwill

 

 

 

27,588

 

Total assets acquired

 

$

 

55,379

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Accounts payable

 

$

 

605

 

Other accrued liabilities

 

 

 

859

 

Deferred tax liabilities

 

 

 

6,419

 

Total liabilities assumed

 

 

 

7,883

 

Net assets acquired

 

$

 

47,496

 

 

The goodwill of $27.6 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.

 

ANADIGICS, Inc.

In March 2016, the Company acquired all the outstanding shares of ANADIGICS, Inc.,(“ANADIGICS”) a previously publicly traded company based in New Jersey. Under the terms of the merger agreement, the consideration consisted of both a working capital advance of $3.5 million and cash paid of $78.2 million at the acquisition date, 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, at the time of the acquisition, ANADIGICS designed and manufactured innovative radiofrequency (RF) solutions for CATV infrastructure, small-cell, WIFI and cellular markets. The Company divested this portion of the business in June 2016. In conjunction with the sale of the RF business, the Company renamed ANADIGICS as II-VI OptoElectronic Devices Division (“OED”). OED is a business unit of the Company’s II-VI Laser Solutions operating segment for financial reporting purposes.

10


 

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

Assets

 

 

 

 

 

Accounts receivable

 

$

 

3,973

 

Inventories

 

 

 

8,322

 

Prepaid and other assets

 

 

 

2,347

 

Property, plant & equipment

 

 

 

25,810

 

Intangible assets

 

 

 

1,060

 

Goodwill

 

 

 

48,312

 

Total assets acquired

 

$

 

89,824

 

Liabilities

 

 

 

 

 

Accounts payable

 

$

 

3,586

 

Other accrued liabilities

 

 

 

7,226

 

Total liabilities assumed

 

 

 

10,812

 

Net assets acquired

 

$

 

79,012

 

 

The goodwill of $48.3 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.

Deferred Income Taxes

In connection with above acquisitions, the Company adopted an accounting policy to apply acquired deferred tax liabilities to pre-existing deferred tax assets before evaluating the need for a valuation allowance for acquired deferred tax assets. During fiscal year 2016, the Company recorded a $36.2 million valuation allowance within purchase accounting as a result of the company incurring a cumulative U.S. three year loss.

Divesture of the RF Business of ANADIGICS

On June 3, 2016, the Company sold the RF business of ANADIGICS that it acquired on March 15, 2016.  The consideration consisted of $45.0 million of cash received at closing, a working capital adjustment of $0.6 million to be received within 60 days after closing and $5.0 million contingent consideration to be earned based upon supplying minimum volumes of wafers to the purchaser over an 18-month period through December 2017. The $5.0 million contingent consideration will be recognized in net earnings when earned and received from the purchaser. During the quarter ended September 30, 2016, the Company recorded $1.25 million of this contingent consideration in Other income, net in the Condensed Consolidated Statement of Earnings. The Company believes the sale of this non-strategic business will allow the Company to focus its financial resources and devote greater attention to the 6-inch wafer fab business. The Company incurred approximately $0.4 million in transaction expenses and recorded an immaterial gain of less than $0.1 million on the sale of the RF business in fiscal year 2016.

 

The following table presents the carrying value of the assets and liabilities included as part of the disposal of the RF business of ANADIGICS ($000):

Assets

 

 

 

 

 

Inventories

 

$

 

5,378

 

Equipment

 

 

 

5,813

 

Goodwill

 

 

 

35,352

 

 

 

$

 

46,543

 

Liabilities

 

 

 

 

 

Accounts payable

 

$

 

963

 

 

 

 

 

 

 

Total Consideration

 

$

 

45,580

 

 

 

 

11


 

Note  4.

Inventories

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

 

 

 

September 30,

 

 

June 30,

 

 

 

2016

 

 

2016

 

Raw materials

 

$

72,808

 

 

$

70,623

 

Work in progress

 

 

60,806

 

 

 

57,566

 

Finished goods

 

 

49,033

 

 

 

46,944

 

 

 

$

182,647

 

 

$

175,133

 

 

 

Note  5.

Property, Plant and Equipment

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

 

 

 

September 30,

 

 

June 30,

 

 

 

2016

 

 

2016

 

Land and land improvements

 

$

5,001

 

 

$

4,990

 

Buildings and improvements

 

 

110,703

 

 

 

110,219

 

Machinery and equipment

 

 

420,306

 

 

 

409,551

 

Construction in progress

 

 

52,277

 

 

 

34,602

 

 

 

 

588,287

 

 

 

559,362

 

Less accumulated depreciation

 

 

(327,375

)

 

 

(316,505

)

 

 

$

260,912

 

 

$

242,857

 

 

 

Note  6.

Goodwill and Other Intangible Assets

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

 

 

 

Three Months Ended September 30, 2016

 

 

 

II-VI Laser

 

 

II-VI

 

 

II-VI Performance

 

 

 

 

 

 

 

Solutions

 

 

Photonics

 

 

Products

 

 

Total

 

Balance-beginning of period

 

$

84,105

 

 

$

96,760

 

 

$

52,890

 

 

$

233,755

 

Foreign currency translation

 

 

8

 

 

 

(159

)

 

 

-

 

 

 

(151

)

Balance-end of period

 

$

84,113

 

 

$

96,601

 

 

$

52,890

 

 

$

233,604

 

 

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, 2016.

 

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

 

 

 

September 30, 2016

 

 

June 30, 2016

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

54,297

 

 

$

(23,780

)

 

$

30,517

 

 

$

54,344

 

 

$

(22,724

)

 

$

31,620

 

Trade Names

 

 

15,852

 

 

 

(1,241

)

 

 

14,611

 

 

 

15,869

 

 

 

(1,209

)

 

 

14,660

 

Customer Lists

 

 

112,113

 

 

 

(35,869

)

 

 

76,244

 

 

 

112,141

 

 

 

(33,912

)

 

 

78,229

 

Other

 

 

1,571

 

 

 

(1,499

)

 

 

72

 

 

 

1,571

 

 

 

(1,490

)

 

 

81

 

Total

 

$

183,833

 

 

$

(62,389

)

 

$

121,444

 

 

$

183,925

 

 

$

(59,335

)

 

$

124,590

 

12


 

 

 

Amortization expense recorded on the Company’s intangible assets was $3.2 million and $3.0 million for the three months ended September 30, 2016 and 2015, respectively. The technology and patents are being amortized over a range of 60 to 240 months, with a weighted average remaining life of approximately 98 months. The customer lists are being amortized over a range of approximately 60 to 240 months with a weighted average remaining life of approximately 142 months. The gross carrying amount of trade names includes $14.1 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, 2016, 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 2017

 

 

 

$

9,514

 

2018

 

 

 

$

12,108

 

2019

 

 

 

$

11,789

 

2020

 

 

 

$

11,048

 

2021

 

 

 

$

10,181

 

 

 

Note  7.

Debt

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

 

 

September 30,

 

 

June 30,

 

 

2016

 

 

2016

 

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

$

147,000

 

 

$

188,000

 

Term loan, interest at LIBOR, as defined, plus 1.5%

 

100,000

 

 

 

45,000

 

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

 

2,966

 

 

 

2,917

 

Total debt

 

249,966

 

 

 

235,917

 

Current portion of long-term debt

 

(20,000

)

 

 

(20,000

)

Unamortized debt issuance costs

 

(1,760

)

 

 

(610

)

Long-term debt, less current portion and debt issuance costs

$

228,206

 

 

$

215,307

 

 

 

On July 28, 2016, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Credit Facility”) which amended the related prior credit facility. The Amended Credit Facility provides for a revolving credit facility of $325 million (increased from $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 commencing on October 1, 2016, 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 July 27, 2021. Amounts borrowed under the revolving credit facility are due and payable on the maturity date. The Amended 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 revolving credit facility in an aggregate additional amount not to exceed $100 million. The Amended Credit Facility has a five-year term through July 27, 2021 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 Amended 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 part of entering into the Amended Credit Facility, the Company incurred $1.4 million of new debt issuance costs which are being amortized over the term of the facility. As of September 30, 2016, the Company was in compliance with all financial covenants under its Amended Credit Facility.

The Company’s Yen denominated line of credit is a 500 million Yen (approximately $4.9 million) facility. The Yen line of credit matures in August 2020. The interest rate is equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.50%. At September 30, 2016 and June 30, 2016, the Company had 300 million Yen borrowed. Additionally, the facility is subject to certain covenants,

13


 

including those relating to minimum interest coverage and maximum leverage ratios. As of September 30, 2016, the Company was in compliance with all financial covenants under its Yen facility.

The Company had aggregate availability of $178.7 million and $37.7 million under its lines of credit as of September 30, 2016 and June 30, 2016, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of September 30, 2016 and June 30, 2016, total outstanding letters of credit supported by these credit facilities was $1.2 million for both periods.

The weighted average interest rate of total borrowings was 2.0% and 1.5% for the three months ended September 30, 2016 and 2015, respectively.

Remaining annual principal payments under the Company’s existing credit facilities as of September 30, 2016 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

 

 

 

-

 

 

 

-

 

 

 

20,000

 

Year 4

 

 

20,000

 

 

 

2,966

 

 

 

-

 

 

 

22,966

 

Year 5

 

 

20,000

 

 

 

-

 

 

 

147,000

 

 

 

167,000

 

Total

 

$

100,000

 

 

$

2,966

 

 

$

147,000

 

 

$

249,966

 

 

 

Note  8.

Income Taxes

The Company’s year-to-date effective income tax rate at September 30, 2016 and 2015 was 31.7% and 22.2%, 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, 2016 and June 30, 2016, the Company’s gross unrecognized income tax benefit was $7.3 million and $5.6 million, respectively. The Company has classified the majority of 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, 2016 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 gross unrecognized income tax benefit was $0.9 million and $0.1 million at September 30, 2016 and June 30, 2016, respectively. Fiscal years 2013 to 2017 remain open to examination by the United States Internal Revenue Service, fiscal years 2011 to 2017 remain open to examination by certain state jurisdictions, and fiscal years 2006 to 2017 remain open to examination by certain foreign taxing jurisdictions. The Company’s fiscal years 2012 through 2015 New Jersey state income tax returns and fiscal years 2006 through 2014 Vietnam income tax returns are currently under examination. The Company believes its income tax reserves for these tax matters are adequate.

 

 

14


 

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 were approximately 368,000 and 232,000 for the three months ended September 30, 2016 and 2015, respectively, because they were anti-dilutive. ($000 except per share data):

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

16,294

 

 

$

17,214

 

Divided by: