10-Q 1 iivi-10q_20161231.htm FORM 10-Q iivi-10q_20161231.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 December 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      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 January 27, 2017, 62,561,471 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, 2016 and June 30, 2016 (Unaudited)

 

3

 

 

 

 

 

 

 

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

 

4

 

 

 

 

 

 

 

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

 

6

 

 

 

 

 

 

 

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

 

7

 

 

 

 

 

 

 

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

 

20

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

30

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

30

 

 

 

 

 

Item 1A.

 

Risk Factors

 

30

 

 

 

 

 

Item 2.

 

Issuer Purchases of Equity Securities

 

30

 

 

 

 

 

Item 6.

 

Exhibits

 

31

 

 

 

2


 

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)

 

 

 

December 31,

 

 

June 30,

 

 

 

2016

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

246,195

 

 

$

218,445

 

Accounts receivable - less allowance for doubtful accounts of $1,961 at December 31, 2016 and $2,016 at June 30, 2016

 

 

153,411

 

 

 

164,817

 

Inventories

 

 

183,062

 

 

 

175,133

 

Prepaid and refundable income taxes

 

 

5,685

 

 

 

6,535

 

Prepaid and other current assets

 

 

21,794

 

 

 

18,033

 

Total Current Assets

 

 

610,147

 

 

 

582,963

 

Property, plant & equipment, net

 

 

305,174

 

 

 

242,857

 

Goodwill

 

 

232,316

 

 

 

233,755

 

Other intangible assets, net

 

 

117,979

 

 

 

124,590

 

Investment

 

 

11,844

 

 

 

11,354

 

Deferred income taxes

 

 

5,161

 

 

 

7,848

 

Other assets

 

 

10,380

 

 

 

8,614

 

Total Assets

 

$

1,293,001

 

 

$

1,211,981

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20,000

 

 

$

20,000

 

Accounts payable

 

 

60,616

 

 

 

53,796

 

Accrued compensation and benefits

 

 

43,742

 

 

 

59,012

 

Accrued income taxes payable

 

 

10,945

 

 

 

12,588

 

Other accrued liabilities

 

 

25,395

 

 

 

25,846

 

Total Current Liabilities

 

 

160,698

 

 

 

171,242

 

Long-term debt

 

 

242,892

 

 

 

215,307

 

Capital lease obligation

 

 

23,964

 

 

 

-

 

Deferred income taxes

 

 

12,793

 

 

 

11,103

 

Other liabilities

 

 

33,608

 

 

 

31,991

 

Total Liabilities

 

 

473,955

 

 

 

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 - 73,577,811 shares at December 31, 2016; 72,840,257 shares at June 30, 2016

 

 

258,215

 

 

 

243,812

 

Accumulated other comprehensive income (loss)

 

 

(28,852

)

 

 

(14,017

)

Retained earnings

 

 

692,985

 

 

 

652,788

 

 

 

 

922,348

 

 

 

882,583

 

Treasury stock, at cost - 11,055,388 shares at December 31, 2016 and 10,965,925 shares at June 30, 2016

 

 

(103,302

)

 

 

(100,245

)

Total Shareholders' Equity

 

 

819,046

 

 

 

782,338

 

Total Liabilities and Shareholders' Equity

 

$

1,293,001

 

 

$

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

 

 

 

December 31,

 

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

74,216

 

 

$

74,177

 

International

 

 

157,606

 

 

 

117,257

 

Total Revenues

 

 

231,822

 

 

 

191,434

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

137,559

 

 

 

120,090

 

Internal research and development

 

 

23,632

 

 

 

12,155

 

Selling, general and administrative

 

 

43,495

 

 

 

37,408

 

Interest expense

 

 

1,365

 

 

 

597

 

Other expense (income), net

 

 

(6,045

)

 

 

(994

)

Total Costs, Expenses & Other Expense (Income)

 

 

200,006

 

 

 

169,256

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

31,816

 

 

 

22,178

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

7,913

 

 

 

3,187

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

23,903

 

 

$

18,991

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

0.38

 

 

$

0.31

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

0.37

 

 

$

0.30

 

 

- 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,

 

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

143,534

 

 

$

144,928

 

International

 

 

309,808

 

 

 

235,713

 

Total Revenues

 

 

453,342

 

 

 

380,641

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

271,477

 

 

 

238,108

 

Internal research and development

 

 

45,464

 

 

 

25,306

 

Selling, general and administrative

 

 

85,574

 

 

 

73,718

 

Interest expense

 

 

2,611

 

 

 

1,246

 

Other expense (income), net

 

 

(7,447

)

 

 

(2,051

)

Total Costs, Expenses & Other Expense (Income)

 

 

397,679

 

 

 

336,327

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

55,663

 

 

 

44,314

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

15,466

 

 

 

8,109

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

40,197

 

 

$

36,205

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

0.65

 

 

$

0.59

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

0.63

 

 

$

0.58

 

 

- 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,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

23,903

 

 

$

18,991

 

 

$

40,197

 

 

$

36,205

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(14,565

)

 

 

(5,411

)

 

 

(15,147

)

 

 

(13,562

)

Pension adjustment, net of taxes of $137 and $85 for the three and six months ended December 31, 2016, respectively, and $4 and $14 for the three and six months ended December 31, 2015, respectively

 

 

424

 

 

 

13

 

 

 

312

 

 

 

49

 

Comprehensive income

 

$

9,762

 

 

$

13,593

 

 

$

25,362

 

 

$

22,692

 

 

- 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,

 

 

 

2016

 

 

2015

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net earnings

 

$

40,197

 

 

$

36,205

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

23,440

 

 

 

21,166

 

Amortization

 

 

6,358

 

 

 

5,958

 

Share-based compensation expense

 

 

5,697

 

 

 

6,949

 

Gains on foreign currency remeasurements and transactions

 

 

(4,664

)

 

 

(951

)

Earnings from equity investment

 

 

(490

)

 

 

(429

)

Deferred income taxes (benefit)

 

 

4,200

 

 

 

(3,788

)

Excess tax benefits from share-based compensation expense

 

 

(503

)

 

 

(112

)

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

   from changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

11,889

 

 

 

10,520

 

Inventories

 

 

(12,909

)

 

 

(7,833

)

Accounts payable

 

 

1,399

 

 

 

(5,167

)

Income taxes

 

 

385

 

 

 

2,540

 

Accrued compensation and benefits

 

 

(14,145

)

 

 

(906

)

Other operating net assets

 

 

(2,162

)

 

 

(1,852

)

Net cash provided by operating activities

 

 

58,692

 

 

 

62,300

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant & equipment

 

 

(57,822

)

 

 

(19,156

)

Purchase of business

 

 

(580

)

 

 

-

 

Other investing activities

 

 

186

 

 

 

39

 

Net cash used in investing activities

 

 

(58,216

)

 

 

(19,117

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

44,000

 

 

 

4,000

 

Payments on borrowings

 

 

(15,000

)

 

 

(33,500

)

Purchases of treasury stock

 

 

-

 

 

 

(6,284

)

Proceeds from exercises of stock options

 

 

7,740

 

 

 

1,794

 

Payments in satisfaction of employees' minimum tax obligations

 

 

(2,271

)

 

 

(1,981

)

Debt issuance costs

 

 

(1,384

)

 

 

-

 

Other financing activities

 

 

503

 

 

 

120

 

Net cash provided by (used in) financing activities

 

 

33,588

 

 

 

(35,851

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(6,314

)

 

 

(3,882

)

Net increase in cash and cash equivalents

 

 

27,750

 

 

 

3,450

 

Cash and Cash Equivalents at Beginning of Period

 

 

218,445

 

 

 

173,634

 

Cash and Cash Equivalents at End of Period

 

$

246,195

 

 

$

177,084

 

Cash paid for interest

 

$

2,413

 

 

$

1,226

 

Cash paid for income taxes

 

$

10,390

 

 

$

8,497

 

Non-cash transactions:

 

 

 

 

 

 

 

 

Capital lease obligation incurred on facility lease

 

$

25,000

 

 

$

-

 

Additions to property, plant & equipment included in accounts payable

 

$

6,715

 

 

$

-

 

 

- 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, 2016

 

 

72,840

 

 

$

243,812

 

 

$

(14,017

)

 

$

652,788

 

 

 

(10,966

)

 

$

(100,245

)

 

$

782,338

 

Shares issued under share-based compensation plans

 

 

701

 

 

 

7,740

 

 

 

-

 

 

 

-

 

 

 

(105

)

 

 

(2,271

)

 

 

5,469

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

40,197

 

 

 

-

 

 

 

-

 

 

 

40,197

 

Treasury stock under deferred compensation arrangements

 

 

37

 

 

 

786

 

 

 

-

 

 

 

-

 

 

 

16

 

 

 

(786

)

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

(15,147

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(15,147

)

Share-based compensation expense

 

 

-

 

 

 

5,697

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,697

 

Pension adjustment, net of taxes of $85

 

 

-

 

 

 

-

 

 

 

312

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

312

 

Net tax benefits from share based compensation expense

 

 

-

 

 

 

180

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

180

 

Balance - December 31, 2016

 

 

73,578

 

 

$

258,215

 

 

$

(28,852

)

 

$

692,985

 

 

 

(11,055

)

 

$

(103,302

)

 

$

819,046

 

 

- 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, 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 and six months ended December 31, 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.

During the quarter ended December 31, 2016, the Company purchased certain assets, mainly inventory and fixed assets, of DirectPhotonics Industries GmbH located in Berlin, Germany for approximately $0.6 million. This business was combined with the Company’s II-VI HIGHYAG division in the II-VI Laser Solutions segment. Due to the insignificant amount of the acquisition purchase price, certain business combinations disclosures typically required under U.S. GAAP have been omitted.

 

 

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 Sheets and retrospectively reclassified $0.6 million that were previously presented as deferred financing costs, an asset on the Consolidated Balance Sheets as of June 30, 2016. There was no effect on the Consolidated Statements of Earnings 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 January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) Simplifying the Accounting for Goodwill Impairment. This standard removes the second step of the goodwill impairment test, where a determination of the fair value of individual assets and liabilities of a reporting unit were needed to measure the goodwill impairment. Under this updated standard, goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company will adopt this for any impairment test performed after July 1, 2017 as permitted under the standard.

9


 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory. This update requires that when intra-entity asset transfers occur, the entity must recognize tax effects in the period in which the transfer occurs. The standard will be effective for The Company’s 2019 fiscal year. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

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 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 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 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 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 adoption of this standard is effective as of June 30, 2017. 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. In May 2016, the FASB issued an amendment which did not change the core principles of the guidance in Topic 606. Rather, the amendments in this update affect only narrow aspects of Topic 606. We have not yet selected a transition method and are currently evaluating the impact of this guidance, along with the subsequent updates and clarifications will have on the Company’s Consolidated Financial Statements.

 

10


 

 

Note  3.

Inventories

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

 

 

 

December 31,

 

 

June 30,

 

 

 

2016

 

 

2016

 

Raw materials

 

$

72,682

 

 

$

70,623

 

Work in progress

 

 

59,405

 

 

 

57,566

 

Finished goods

 

 

50,975

 

 

 

46,944

 

 

 

$

183,062

 

 

$

175,133

 

 

 

Note  4.

Property, Plant and Equipment

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

 

 

 

December 31,

 

 

June 30,

 

 

 

2016

 

 

2016

 

Land and improvements

 

$

4,880

 

 

$

4,990

 

Buildings and improvements

 

 

135,142

 

 

 

110,219

 

Machinery and equipment

 

 

429,556

 

 

 

409,551

 

Construction in progress

 

 

74,965

 

 

 

34,602

 

 

 

 

644,543

 

 

 

559,362

 

Less accumulated depreciation

 

 

(339,369

)

 

 

(316,505

)

 

 

$

305,174

 

 

$

242,857

 

 

 

Note  5.

Goodwill and Other Intangible Assets

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

 

 

 

Six Months Ended December 31, 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

 

 

(136

)

 

 

(1,303

)

 

 

-

 

 

 

(1,439

)

Balance-end of period

 

$

83,969

 

 

$

95,457

 

 

$

52,890

 

 

$

232,316

 

 

Note 1 of the Notes to the 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, 2016.

 

11


 

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

 

 

 

December 31, 2016

 

 

June 30, 2016

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

53,941

 

 

$

(24,813

)

 

$

29,128

 

 

$

54,344

 

 

$

(22,724

)

 

$

31,620

 

Trademarks

 

 

15,731

 

 

 

(1,275

)

 

 

14,456

 

 

 

15,869

 

 

 

(1,209

)

 

 

14,660

 

Customer Lists

 

 

111,745

 

 

 

(37,415

)

 

 

74,330

 

 

 

112,141

 

 

 

(33,912

)

 

 

78,229

 

Other

 

 

1,568

 

 

 

(1,503

)

 

 

65

 

 

 

1,571

 

 

 

(1,490

)

 

 

81

 

Total

 

$

182,985

 

 

$

(65,006

)

 

$

117,979

 

 

$

183,925

 

 

$

(59,335

)

 

$

124,590

 

 

Amortization expense recorded on the Company’s intangible assets was $3.2 million and $6.4 million for the three and six months ended December 31, 2016, respectively, and was $3.0 million and $6.0 million for the three and six months ended December 31, 2015, respectively. Technology and patents are being amortized over a range of 60 to 240 months, with a weighted average remaining life of approximately 96 months. Customer lists are being amortized over a range of approximately 120 to 240 months with a weighted average remaining life of approximately 139 months. The gross carrying amount of trademarks includes $14.0 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, 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

 

$

6,342

 

2018

 

 

12,108

 

2019

 

 

11,789

 

2020

 

 

10,981

 

2021

 

 

10,125

 

 

 

Note  6.

Debt

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

 

 

 

December 31,

 

 

June 30,

 

 

 

2016

 

 

2016

 

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

 

$

167,000

 

 

$

188,000

 

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

 

 

95,000

 

 

 

45,000

 

Yen denominated line of credit, interest at LIBOR, as

   defined, plus 0.625%

 

 

2,566

 

 

 

2,917

 

Total debt

 

 

264,566

 

 

 

235,917

 

Current portion of long-term debt

 

 

(20,000

)

 

 

(20,000

)

Unamortized debt issuance costs

 

 

(1,674

)

 

 

(610

)

Long-term debt, less current portion

 

$

242,892

 

 

$

215,307

 

 

 

12


 

On July 28, 2016, the Company amended and restated its existing credit agreement. The Third Amended and Restated Credit Agreement (the “Amended Credit Facility”) provides for a revolving credit facility of $325 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, 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 of December 31, 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 $4.3 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 December 31, 2016 and June 30, 2016, 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, 2016, the Company was in compliance with all financial covenants under its Yen facility.

The Company had aggregate availability of $158.5 million and $37.7 million under its lines of credit as of December 31, 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 December 31, 2016 and June 30, 2016, total outstanding letters of credit supported by these credit facilities were $1.2 million for both periods.

The weighted average interest rate of total borrowings was 2.1% and 1.5% for the six months ended December 31, 2016 and 2015, respectively.

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

 

 

 

2,566

 

 

 

-

 

 

 

22,566

 

Year 5

 

 

15,000

 

 

 

-

 

 

 

167,000

 

 

 

182,000

 

Total

 

$

95,000

 

 

$

2,566

 

 

$

167,000

 

 

$

264,566

 

 

 

Note  7.

Income Taxes

The Company’s year-to-date effective income tax rate at December 31, 2016 and 2015 was 27.8% and 18.3%, respectively. The variations between the Company’s effective tax rate and the U.S. statutory rate of 35% were primarily due to the consolidation of the Company’s foreign operations, which are subject to income taxes at lower statutory rates.  

13


 

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, 2016 and June 30, 2016, the Company’s gross unrecognized income tax benefit was $8.2 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, the majority of the gross unrecognized tax benefits at December 31, 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 $1.2 million and $0.1 million at December 31, 2016 and June 30, 2016, respectively. Fiscal years 2013 to 2017 remain open to examination by the United States Internal Revenue Service, fiscal years 2012 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 year 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.

 

 

Note  8.

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 are not included in the calculation because they were anti-dilutive and totaled approximately 86,000 and 227,000 for the three and six months ended December 31, 2016, respectively, and 193,000 and 212,000 for the three and six months ended December 31, 2015, respectively ($000 except per share data):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net earnings

 

$

23,903

 

 

$

18,991

 

 

$

40,197

 

 

$

36,205

 

Divided by: