10-Q 1 iivi-10q_20170331.htm FORM 10-Q iivi-10q_20170331.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 March 31, 2017

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, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act       

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 April 27, 2017, 63,128,756 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, 2017 and June 30, 2016 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings – Three and nine months ended March 31, 2017 and 2016 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Three and nine months ended March 31, 2017 and 2016 (Unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash FlowsNine months ended March 31, 2017 and 2016 (Unaudited)

 

7

 

 

 

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity – Nine months ended March 31, 2017 (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)

 

 

 

March 31,

 

 

June 30,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

247,581

 

 

$

218,445

 

Accounts receivable - less allowance for doubtful accounts of $1,340 at March 31, 2017 and $2,016 at June 30, 2016

 

 

173,564

 

 

 

164,817

 

Inventories

 

 

191,802

 

 

 

175,133

 

Prepaid and refundable income taxes

 

 

5,389

 

 

 

6,535

 

Prepaid and other current assets

 

 

20,485

 

 

 

18,033

 

Total Current Assets

 

 

638,821

 

 

 

582,963

 

Property, plant & equipment, net

 

 

335,752

 

 

 

242,857

 

Goodwill

 

 

232,513

 

 

 

233,755

 

Other intangible assets, net

 

 

114,840

 

 

 

124,590

 

Investment

 

 

12,007

 

 

 

11,354

 

Deferred income taxes

 

 

5,940

 

 

 

7,848

 

Other assets

 

 

7,775

 

 

 

8,614

 

Total Assets

 

$

1,347,648

 

 

$

1,211,981

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20,000

 

 

$

20,000

 

Accounts payable

 

 

66,909

 

 

 

53,796

 

Accrued compensation and benefits

 

 

45,740

 

 

 

59,012

 

Accrued income taxes payable

 

 

10,364

 

 

 

12,588

 

Other accrued liabilities

 

 

23,029

 

 

 

25,846

 

Total Current Liabilities

 

 

166,042

 

 

 

171,242

 

Long-term debt

 

 

258,101

 

 

 

215,307

 

Capital lease obligation

 

 

23,689

 

 

 

-

 

Deferred income taxes

 

 

12,990

 

 

 

11,103

 

Other liabilities

 

 

33,930

 

 

 

31,991

 

Total Liabilities

 

 

494,752

 

 

 

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 - 73,996,491 shares at March 31, 2017; 72,840,257 shares at June 30, 2016

 

 

262,247

 

 

 

243,812

 

Accumulated other comprehensive income (loss)

 

 

(25,999

)

 

 

(14,017

)

Retained earnings

 

 

715,415

 

 

 

652,788

 

 

 

 

951,663

 

 

 

882,583

 

Treasury stock, at cost - 10,928,083 shares at March 31, 2017 and 10,965,925 shares at June 30, 2016

 

 

(98,767

)

 

 

(100,245

)

Total Shareholders' Equity

 

 

852,896

 

 

 

782,338

 

Total Liabilities and Shareholders' Equity

 

$

1,347,648

 

 

$

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

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

80,940

 

 

$

74,884

 

International

 

 

164,047

 

 

 

130,221

 

Total Revenues

 

 

244,987

 

 

 

205,105

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

147,277

 

 

 

127,436

 

Internal research and development

 

 

25,380

 

 

 

14,946

 

Selling, general and administrative

 

 

43,291

 

 

 

43,333

 

Interest expense

 

 

1,936

 

 

 

769

 

Other expense (income), net

 

 

(2,164

)

 

 

1,257

 

Total Costs, Expenses & Other Expense (Income)

 

 

215,720

 

 

 

187,741

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

29,267

 

 

 

17,364

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

6,837

 

 

 

2,426

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

22,430

 

 

$

14,938

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

0.36

 

 

$

0.24

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

0.35

 

 

$

0.24

 

 

- 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,

 

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

Domestic

 

$

224,474

 

 

$

219,812

 

International

 

 

473,855

 

 

 

365,934

 

Total Revenues

 

 

698,329

 

 

 

585,746

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

418,754

 

 

 

365,544

 

Internal research and development

 

 

70,844

 

 

 

40,252

 

Selling, general and administrative

 

 

128,865

 

 

 

117,051

 

Interest expense

 

 

4,547

 

 

 

2,015

 

Other expense (income), net

 

 

(9,611

)

 

 

(794

)

Total Costs, Expenses & Other Expense (Income)

 

 

613,399

 

 

 

524,068

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

84,930

 

 

 

61,678

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

22,303

 

 

 

10,535

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

62,627

 

 

$

51,143

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

1.00

 

 

$

0.83

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

0.97

 

 

$

0.81

 

 

- 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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net earnings

 

$

22,430

 

 

$

14,938

 

 

$

62,627

 

 

$

51,143

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

3,002

 

 

 

4,553

 

 

 

(12,145

)

 

 

(9,009

)

Pension adjustment, net of taxes of ($40) and $45 for the three and nine months ended March 31, 2017, respectively, and ($5) and $9 for the three and nine months ended March 31, 2016, respectively

 

 

(149

)

 

 

(17

)

 

 

163

 

 

 

32

 

Comprehensive income

 

$

25,283

 

 

$

19,474

 

 

$

50,645

 

 

$

42,166

 

 

- 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,

 

 

 

2017

 

 

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net earnings

 

$

62,627

 

 

$

51,143

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

35,190

 

 

 

32,613

 

Amortization

 

 

9,532

 

 

 

9,172

 

Share-based compensation expense

 

 

8,695

 

 

 

8,516

 

(Gains) losses on foreign currency remeasurements and transactions

 

 

(3,633

)

 

 

586

 

Earnings from equity investment

 

 

(654

)

 

 

(653

)

Deferred income taxes (benefit)

 

 

248

 

 

 

(1,193

)

Excess tax benefits from share-based compensation expense

 

 

-

 

 

 

(96

)

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

   from changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(8,220

)

 

 

(4,548

)

Inventories

 

 

(20,273

)

 

 

(8,950

)

Accounts payable

 

 

7,610

 

 

 

(337

)

Income taxes

 

 

2,958

 

 

 

(2,628

)

Accrued compensation and benefits

 

 

(12,387

)

 

 

6,471

 

Other operating net assets

 

 

(3,321

)

 

 

(8,860

)

Net cash provided by operating activities

 

 

78,372

 

 

 

81,236

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant & equipment

 

 

(99,135

)

 

 

(32,743

)

Purchases of businesses

 

 

(580

)

 

 

(118,657

)

Other investing activities

 

 

1,707

 

 

 

92

 

Net cash used in investing activities

 

 

(98,008

)

 

 

(151,308

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

64,000

 

 

 

125,200

 

Payments on borrowings

 

 

(20,000

)

 

 

(38,500

)

Proceeds from exercises of stock options

 

 

14,625

 

 

 

7,444

 

Payments in satisfaction of employees' minimum tax obligations

 

 

(3,407

)

 

 

(1,983

)

Debt issuance costs

 

 

(1,384

)

 

 

-

 

Purchases of treasury stock

 

 

-

 

 

 

(6,284

)

Other financing activities

 

 

-

 

 

 

96

 

Net cash provided by financing activities

 

 

53,834

 

 

 

85,973

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(5,062

)

 

 

(2,162

)

Net increase in cash and cash equivalents

 

 

29,136

 

 

 

13,739

 

Cash and Cash Equivalents at Beginning of Period

 

 

218,445

 

 

 

173,634

 

Cash and Cash Equivalents at End of Period

 

$

247,581

 

 

$

187,373

 

Cash paid for interest

 

$

3,937

 

 

$

1,859

 

Cash paid for income taxes

 

$

16,852

 

 

$

13,378

 

Non-cash transactions:

 

 

 

 

 

 

 

 

Capital lease obligation incurred on facility lease

 

$

25,000

 

 

$

-

 

Additions to property, plant & equipment included in accounts payable

 

$

6,521

 

 

$

-

 

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, 2016

 

 

72,840

 

 

$

243,812

 

 

$

(14,017

)

 

$

652,788

 

 

 

(10,966

)

 

$

(100,245

)

 

$

782,338

 

Shares issued under share-based compensation plans

 

 

1,119

 

 

 

14,625

 

 

 

-

 

 

 

-

 

 

 

(137

)

 

 

(3,407

)

 

 

11,218

 

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

62,627

 

 

 

-

 

 

 

-

 

 

 

62,627

 

Treasury stock under deferred compensation arrangements

 

 

37

 

 

 

(4,885

)

 

 

-

 

 

 

-

 

 

 

175

 

 

 

4,885

 

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

(12,145

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(12,145

)

Share-based compensation expense

 

 

-

 

 

 

8,695

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,695

 

Pension adjustment, net of taxes of $45

 

 

-

 

 

 

-

 

 

 

163

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

163

 

Balance - March 31, 2017

 

 

73,996

 

 

$

262,247

 

 

$

(25,999

)

 

$

715,415

 

 

 

(10,928

)

 

$

(98,767

)

 

$

852,896

 

 

- 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, 2017 and 2016 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 nine months ended March 31, 2017 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. This update 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 March 2017, the FASB issued ASU 2017-07, Consolidation (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update affects Employers’ presentation of defined benefit retirement plan costs. Early adoption is permitted. 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 February 2017, the FASB issued ASU 2017-05, Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial assets. This update provides clarification on the scope and application of the sale or transfer of nonfinancial assets and in substance nonfinancial assets to

9


 

noncustomers, including partial sales. Early adoption is permitted but only as of fiscal years beginning after December 15, 2016. 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 January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business. This update changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Early adoption is permitted. The standard will be effective for the Company’s 2020 fiscal year. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

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.

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 June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update is intended to provide financial statement users with more decision-useful information about expected credit losses and other commitments to extend credit held by the reporting entity. The standard replaces the incurred loss impairment methodology in current GAAP with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update will be effective for the Company’s 2021 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 eliminates the requirement to retrospectively apply the equity method in previous periods when an investor obtains significant influence over an investee. 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.

10


 

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 that this guidance, along with the subsequent updates and clarifications, will have on the Company’s Consolidated Financial Statements.

 

 

Note  3.

Inventories

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

 

 

 

March 31,

 

 

June 30,

 

 

 

2017

 

 

2016

 

Raw materials

 

$

76,215

 

 

$

70,623

 

Work in progress

 

 

65,059

 

 

 

57,566

 

Finished goods

 

 

50,528

 

 

 

46,944

 

 

 

$

191,802

 

 

$

175,133

 

 

 

Note  4.

Property, Plant and Equipment

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

 

 

 

March 31,

 

 

June 30,

 

 

 

2017

 

 

2016

 

Land and improvements

 

$

4,604

 

 

$

4,990

 

Buildings and improvements

 

 

131,542

 

 

 

110,219

 

Machinery and equipment

 

 

448,643

 

 

 

409,551

 

Construction in progress

 

 

97,674

 

 

 

34,602

 

 

 

 

682,463

 

 

 

559,362

 

Less accumulated depreciation

 

 

(346,711

)

 

 

(316,505

)

 

 

$

335,752

 

 

$

242,857

 

 

During the quarter ending March 31, 2017, the Company sold its manufacturing facility located in Newport Ritchey, Florida. The Company received $1.7 million, net of customary closing costs and a $0.3 million reserve held in escrow for environmental purposes. The gain on sale of $0.3 million was recorded in other expense (income), net in the Condensed Consolidated Statement of Earnings.

 

 

11


 

Note  5.

Goodwill and Other Intangible Assets

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

 

 

 

Nine Months Ended March 31, 2017

 

 

 

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

 

 

(100

)

 

 

(1,142

)

 

 

-

 

 

 

(1,242

)

Balance-end of period

 

$

84,005

 

 

$

95,618

 

 

$

52,890

 

 

$

232,513

 

 

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 March 31, 2017.

 

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of March 31, 2017 and June 30, 2016 were as follows ($000):

 

 

 

March 31, 2017

 

 

June 30, 2016

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

53,994

 

 

$

(26,010

)

 

$

27,984

 

 

$

54,344

 

 

$

(22,724

)

 

$

31,620

 

Trademarks

 

 

15,749

 

 

 

(1,308

)

 

 

14,441

 

 

 

15,869

 

 

 

(1,209

)

 

 

14,660

 

Customer Lists

 

 

111,807

 

 

 

(39,448

)

 

 

72,359

 

 

 

112,141

 

 

 

(33,912

)

 

 

78,229

 

Other

 

 

1,569

 

 

 

(1,513

)

 

 

56

 

 

 

1,571

 

 

 

(1,490

)

 

 

81

 

Total

 

$

183,119

 

 

$

(68,279

)

 

$

114,840

 

 

$

183,925

 

 

$

(59,335

)

 

$

124,590

 

 

Amortization expense recorded on the Company’s intangible assets was $3.1 million and $9.5 million for the three and nine months ended March 31, 2017, respectively, and was $3.2 million and $9.2 million for the three and nine months ended March 31, 2016, respectively. Technology and patents are being amortized over a range of 60 to 240 months, with a weighted average remaining life of approximately 94 months. Customer lists are being amortized over a range of approximately 120 to 240 months with a weighted average remaining life of approximately 137 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 March 31, 2017, the estimated amortization expense for existing intangible assets for each of the five succeeding fiscal years is as follows ($000):

 

Fiscal Year Ending June 30,

 

Amount

 

Remaining 2017

 

$

3,156

 

2018

 

 

12,108

 

2019

 

 

11,789

 

2020

 

 

10,981

 

2021

 

 

10,125

 

 

 

12


 

Note  6.

Debt

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

 

 

 

March 31,

 

 

June 30,

 

 

 

2017

 

 

2016

 

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

 

$

187,000

 

 

$

188,000

 

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

 

 

90,000

 

 

 

45,000

 

Yen denominated line of credit, interest at LIBOR, as

   defined, plus 0.625%

 

 

2,683

 

 

 

2,917

 

Total debt

 

 

279,683

 

 

 

235,917

 

Current portion of long-term debt

 

 

(20,000

)

 

 

(20,000

)

Unamortized debt issuance costs

 

 

(1,582

)

 

 

(610

)

Long-term debt, less current portion

 

$

258,101

 

 

$

215,307

 

 

 

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 March 31, 2017, 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 $4.5 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 March 31, 2017 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 March 31, 2017, the Company was in compliance with all financial covenants under its Yen facility.

The Company had aggregate availability of $138.4 million and $37.7 million under its lines of credit as of March 31, 2017 and June 30, 2016, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of March 31, 2017 and June 30, 2016, total outstanding letters of credit supported by these credit facilities were $1.4 million and $1.2 million, respectively.

The weighted average interest rate of total borrowings was 2.3% and 1.6% for the nine months ended March 31, 2017 and 2016, respectively.

Remaining annual principal payments under the Company’s existing credit facilities as of March 31, 2017 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

 

 

 

2,683

 

 

 

-

 

 

 

22,683

 

Year 5

 

 

10,000

 

 

 

-

 

 

 

187,000

 

 

 

197,000

 

Total

 

$

90,000

 

 

$

2,683

 

 

$

187,000

 

 

$

279,683

 

 

 

13


 

Note  7.

Income Taxes

The Company’s year-to-date effective income tax rate at March 31, 2017 and 2016 was 26.3% and 17.1%, 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.  

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 March 31, 2017 and June 30, 2016, the Company’s gross unrecognized income tax benefit was $6.6 million and $5.6 million, respectively. The Company has classified the uncertain tax positions as noncurrent income tax liabilities, as the amounts are not expected to be paid within one year. If recognized, $0.5 million of the gross unrecognized tax benefits at March 31, 2017 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 $0.2 million and $0.1 million at March 31, 2017 and June 30, 2016, respectively. Fiscal years 2014 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 income tax returns are not 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 36,000 and 163,000 for the three and nine months ended March 31, 2017, respectively, and 109,000 and 178,000 for the three and nine months ended March 31, 2016, respectively ($000 except per share data):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net earnings

 

$

22,430

 

 

$

14,938

 

 

$

62,627

 

 

$

51,143

 

Divided by:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares