10-Q 1 iivi-10q_20170930.htm 10-Q iivi-10q_20170930.htm

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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, 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 November 3, 2017, 62,370,557 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, 2017 and June 30, 2017 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings – Three months ended September 30, 2017 and 2016 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Three months ended September 30, 2017 and 2016 (Unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows Three Months Ended September 30, 2017 and 2016 (Unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity – Three Months Ended September 30, 2017 (Unaudited)

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

8

 

 

 

 

 

Item 2.

 

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

 

22

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

31

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

31

 

 

 

 

 

Item 1A.

 

Risk Factors

 

31

 

 

 

 

 

Item 2.

 

Issuer Purchases of Equity Securities

 

31

 

 

 

 

 

Item 6.

 

Exhibits

 

33

 

 

 

2


 

PART I - FINANCIAL INFORMATION

Item  1.

FINANCIAL STATEMENTS

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)

 

 

 

September 30,

 

 

June 30,

 

 

 

2017

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

241,285

 

 

$

271,888

 

Accounts receivable - less allowance for doubtful accounts of $1,622 at September 30, 2017 and $1,314 at June 30, 2017

 

 

192,828

 

 

 

193,379

 

Inventories

 

 

224,461

 

 

 

203,695

 

Prepaid and refundable income taxes

 

 

6,410

 

 

 

6,732

 

Prepaid and other current assets

 

 

28,704

 

 

 

26,602

 

Total Current Assets

 

 

693,688

 

 

 

702,296

 

Property, plant & equipment, net

 

 

460,859

 

 

 

367,728

 

Goodwill

 

 

270,103

 

 

 

250,342

 

Other intangible assets, net

 

 

135,905

 

 

 

133,957

 

Investment

 

 

11,998

 

 

 

11,727

 

Deferred income taxes

 

 

2,950

 

 

 

3,023

 

Other assets

 

 

8,302

 

 

 

8,224

 

Total Assets

 

$

1,583,805

 

 

$

1,477,297

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20,000

 

 

$

20,000

 

Accounts payable

 

 

73,271

 

 

 

65,540

 

Accrued compensation and benefits

 

 

42,199

 

 

 

58,178

 

Accrued income taxes payable

 

 

12,216

 

 

 

12,178

 

Other accrued liabilities

 

 

30,789

 

 

 

29,056

 

Total Current Liabilities

 

 

178,475

 

 

 

184,952

 

Long-term debt

 

 

384,742

 

 

 

322,022

 

Capital lease obligation

 

 

23,144

 

 

 

23,415

 

Deferred income taxes

 

 

23,751

 

 

 

15,345

 

Other liabilities

 

 

29,931

 

 

 

31,000

 

Total Liabilities

 

 

640,043

 

 

 

576,734

 

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 - 74,632,347 shares at September 30, 2017; 74,081,451 shares at June 30, 2017

 

 

334,126

 

 

 

269,638

 

Accumulated other comprehensive income (loss)

 

 

(2,599

)

 

 

(13,778

)

Retained earnings

 

 

769,203

 

 

 

748,062

 

 

 

 

1,100,730

 

 

 

1,003,922

 

Treasury stock, at cost - 12,453,513 shares at September 30, 2017 and 10,940,062 shares at June 30, 2017

 

 

(156,968

)

 

 

(103,359

)

Total Shareholders' Equity

 

 

943,762

 

 

 

900,563

 

Total Liabilities and Shareholders' Equity

 

$

1,583,805

 

 

$

1,477,297

 

 

- 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,

 

 

 

2017

 

 

2016

 

Revenues

 

 

261,503

 

 

 

221,520

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

155,528

 

 

 

133,918

 

Internal research and development

 

 

25,574

 

 

 

21,832

 

Selling, general and administrative

 

 

50,624

 

 

 

42,079

 

Interest expense

 

 

3,645

 

 

 

1,246

 

Other expense (income), net

 

 

(767

)

 

 

(1,402

)

Total Costs, Expenses and Other Expense (Income)

 

 

234,604

 

 

 

197,673

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

26,899

 

 

 

23,847

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

5,758

 

 

 

7,553

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

21,141

 

 

$

16,294

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

0.34

 

 

$

0.26

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

0.32

 

 

$

0.26

 

 

- 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,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

21,141

 

 

$

16,294

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

11,097

 

 

 

(582

)

Pension adjustment, net of taxes of $23 and ($52) for the three months ended, respectively

 

 

82

 

 

 

(112

)

Comprehensive income

 

$

32,320

 

 

$

15,600

 

 

- 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,

 

 

 

2017

 

 

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net earnings

 

$

21,141

 

 

$

16,294

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

15,219

 

 

 

11,708

 

Amortization

 

 

3,597

 

 

 

3,174

 

Share-based compensation expense

 

 

4,250

 

 

 

3,073

 

(Gain) loss on foreign currency remeasurements and transactions

 

 

(496

)

 

 

582

 

Earnings from equity investment

 

 

(270

)

 

 

(331

)

Deferred income taxes

 

 

(2,995

)

 

 

1,521

 

Increase (decrease) in cash from changes in (net of effect of acquisitions):

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,716

 

 

 

8,283

 

Inventories

 

 

(13,891

)

 

 

(7,551

)

Accounts payable

 

 

2,542

 

 

 

8,338

 

Income taxes

 

 

235

 

 

 

166

 

Accrued compensation and benefits

 

 

(16,434

)

 

 

(19,756

)

Other operating net assets

 

 

(3,231

)

 

 

(5,988

)

Net cash provided by operating activities

 

 

12,383

 

 

 

19,513

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant & equipment

 

 

(37,426

)

 

 

(29,994

)

Purchase of business, net of cash acquired

 

 

(79,465

)

 

 

-

 

Other investing activities

 

 

136

 

 

 

145

 

Net cash used in investing activities

 

 

(116,755

)

 

 

(29,849

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of 0.25% convertible senior notes due 2022

 

 

345,000

 

 

 

-

 

Proceeds from borrowings under Credit Facility

 

 

40,000

 

 

 

24,000

 

Payments on borrowings under Credit Facility

 

 

(257,000

)

 

 

(10,000

)

Purchases of treasury stock

 

 

(49,875

)

 

 

-

 

Proceeds from exercises of stock options

 

 

3,706

 

 

 

1,745

 

Payments in satisfaction of employees' minimum tax obligations

 

 

(3,608

)

 

 

(2,230

)

Debt issuance costs

 

 

(10,061

)

 

 

(1,384

)

Other financing activities

 

 

-

 

 

 

139

 

Net provided by financing activities

 

 

68,162

 

 

 

12,270

 

Effect of exchange rate changes on cash and cash equivalents

 

 

5,607

 

 

 

(283

)

Net (decrease) increase in cash and cash equivalents

 

 

(30,603

)

 

 

1,651

 

Cash and Cash Equivalents at Beginning of Period

 

 

271,888

 

 

 

218,445

 

Cash and Cash Equivalents at End of Period

 

$

241,285

 

 

$

220,096

 

Cash paid for interest

 

$

2,196

 

 

$

1,092

 

Cash paid for income taxes

 

$

6,167

 

 

$

5,721

 

 

 

 

 

 

 

 

 

 

Non cash transactions:

 

 

 

 

 

 

 

 

Additions to property, plant & equipment included in accounts payable

 

$

3,925

 

 

$

-

 

 

- 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 (Loss)

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2017

 

 

74,081

 

 

$

269,638

 

 

$

(13,778

)

 

$

748,062

 

 

 

(10,940

)

 

$

(103,359

)

 

$

900,563

 

Shares issued under share-based compensation plan

 

 

551

 

 

 

3,706

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,706

 

Shares acquired in satisfaction of minimum tax withholding obligations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(99

)

 

 

(3,608

)

 

 

(3,608

)

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

21,141

 

 

 

-

 

 

 

-

 

 

 

21,141

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,415

)

 

 

(49,875

)

 

 

(49,875

)

Treasury stock under deferred compensation arrangements

 

 

-

 

 

 

126

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(126

)

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

11,097

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,097

 

Equity portion of convertible debt, net of issuance costs of $1,694

 

 

-

 

 

 

56,406

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

56,406

 

Share-based compensation expense

 

 

-

 

 

 

4,250

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,250

 

Pension adjustment, net of taxes of $23

 

 

-

 

 

 

-

 

 

 

82

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

82

 

Balance - September 30, 2017

 

 

74,632

 

 

$

334,126

 

 

$

(2,599

)

 

$

769,203

 

 

 

(12,454

)

 

$

(156,968

)

 

$

943,762

 

 

- 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”, the “Company”, “we”, “us” or “our”) for the three months ended  September 30, 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, 2017. The consolidated results of operations for the three months ended  September 30, 2017 are not necessarily indicative of the results to be expected for the full fiscal year. The June 30, 2017 Condensed Consolidated Balance Sheet information was derived from the Company’s audited financial statements.

 

 

Note  2.

Recently Issued Financial Accounting Standards

Adopted Pronouncements

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The new guidance will be applied prospectively to awards modified on or after the adoption date. The adoption of this standard did not 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 has adopted this standard for any impairment test that is performed after July 1, 2017 as permitted under the standard.

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. Under this ASU, excess tax benefits or deficiencies are recognized in income tax expense in the Condensed Consolidated Statement of Earnings. Upon adoption of this ASU, the Company had a valuation allowance for its U.S. deferred tax assets and did not recognize any tax benefit. Had the Company not had a valuation allowance, the Company would have recognized a tax benefit of $2.4 million. The impact to the Company’s dilutive shares under this new standard was immaterial.

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

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This update simplifies the measurement of inventory valuation at the lower of cost or net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The adoption of this standard did not have a material effect 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 adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.

8


 

Revenue Recognition Pronouncement Currently Under Evaluation

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. The update will be effective for the Company’s 2019 fiscal year (July 1, 2018).

We continue our evaluation of the impact of the ASU in fiscal 2018 by evaluating its impact on selected contracts at each of our business segments.  As the ASU will supersede all existing revenue guidance affecting U.S. GAAP, it could impact revenue and cost recognition on our contracts across all our business segments, as well as our business processes and our information technology.  As a result, our evaluation of the effect of the ASU will continue through fiscal year 2018. The Company has completed its assessment of its military related contracts that comprise approximately 10% of consolidated revenues and concluded that the Company will accelerate the recognition of revenue under the ASU for these contracts as the customer obtains control of the goods or service promised in the contract. The Company is currently evaluating the commercial portion of its business; the assessment will be completed during fiscal year 2018. Based upon our evaluation to date, we cannot currently estimate the impacts of adopting the ASU at this time. The Company will adopt this ASU using the modified retrospective method whereby the cumulative effect of applying the ASU would be recognized at the beginning of the year of adoption.

Other Pronouncements Currently Under Evaluation

In August 2017 the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. 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 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 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 2019 fiscal year. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

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. 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 August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The guidance clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flow. 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 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

9


 

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.

 

Note  3.

Acquisition

Kaiam Laser Limited, Inc.

In August 2017, the Company acquired Kaiam Laser Limited, Inc. (“Kaiam”) a privately held company based in Newton Aycliffe, United Kingdom. Under the terms of the merger agreement, the consideration consisted of cash paid at the acquisition date of $79.5 million, net of cash acquired. The acquisition of Kaiam provides the Company with 150mm wafer fabrication platform to significantly expand the Company’s capacity for the production of vertical cavity surface emitting lasers (“VCSELs”) for the 3D sensing market and broadens the capability to address new market opportunities in other compound semiconductor materials. Kaiam will operate under the name II-VI Compound Semiconductor Ltd. within the Company’s II-VI Laser Solutions operating segment. Due to the timing of the acquisition, the Company is still in the process of measuring the fair value of assets acquired, including tangible, intangible assets and related deferred income taxes.

 

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

 

Assets

 

 

 

 

 

Accounts receivable

 

$

 

79

 

Inventories

 

 

 

4,559

 

Prepaid and other assets

 

 

 

1,246

 

Property, plant & equipment

 

 

 

64,482

 

Intangible assets

 

 

 

5,146

 

Goodwill

 

 

 

18,307

 

Total assets acquired

 

$

 

93,819

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Accounts payable

 

$

751

 

Other accrued liabilities

 

 

 

2,486

 

Deferred tax liabilities

 

 

 

11,117

 

Total liabilities assumed

 

 

 

14,354

 

Net assets acquired

 

$

 

79,465

 

The goodwill of $18.3 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the assembled workforce of Kaiam. None of the goodwill is deductible for income tax purposes. The Company expensed transaction costs of $1.0 million for the three months ended September 30, 2017.

The amount of revenues and net loss of Kaiam included in the Company’s Consolidated Statement of Earnings for the three months ended September 30, 2017 was $0.6 million and $3.7 million, respectively.

Integrated Photonics, Inc.

In June 2017, the Company acquired Integrated Photonics, Inc. (“IPI”), a privately held company based in New Jersey. IPI is a leader in engineered magneto-optic materials that enable high-performance directional components such as optical isolators for the optical communications market. Under the terms of the merger agreement, the consideration consisted of initial cash paid at the acquisition date of $39.4 million, net of cash acquired and a working capital adjustment of $0.7 million. In addition, the agreement provides up to a maximum of $2.5 million of additional cash earnout opportunities based upon IPI achieving certain agreed upon financial and transitional objectives, which if earned would be payable in the amount of $2.5 million for the achievement of the annual target.

The following table presents the preliminary purchase price at the date of acquisition ($000):

 

Net cash paid at acquisition

 

$

 

39,436

 

Fair value of cash earnout arrangement

 

 

 

2,250

 

Purchase price

 

$

 

41,686

 

10


 

The following table presents the preliminary allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition, as the Company intends to finalize its accounting for the valuation of property, plant and equipment, identifiable intangibles and deferred income tax liabilities and anticipates completion of the valuation within one year from the date of the acquisition ($000):

 

Assets

 

 

 

 

 

Accounts receivable

 

$

 

2,083

 

Inventories

 

 

 

3,968

 

Prepaid and other assets

 

 

322

 

Property, plant & equipment

 

 

 

11,257

 

Intangible assets

 

 

 

22,213

 

Goodwill

 

 

 

17,107

 

Total assets acquired

 

$

 

56,950

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Accounts payable

 

$

846

 

Other accrued liabilities

 

 

 

1,032

 

Long-term debt assumed

 

 

 

3,834

 

Deferred tax liabilities

 

 

 

9,552

 

Total liabilities assumed

 

 

 

15,264

 

Net assets acquired

 

$

 

41,686

 

The goodwill of $17.1 million is included in the II-VI Photonics segment and is attributed to the expected synergies and the assembled workforce of IPI. None of the goodwill is deductible for income tax purposes. The fair value of accounts receivable acquired was $2.1 million with the gross contractual amount being $2.1 million. At the time of acquisition, the Company expected to collect all of the accounts receivable. The Company expensed transaction costs of $0.3 million all within the year ended June 30, 2017.

The amount of revenues and net earnings of IPI included in the Company’s Consolidated Statement of Earnings for the three months ended September 30, 2017 was $5.4 million and $0.4 million, respectively.

 

 

Note  4.

Inventories

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

 

 

 

September 30,

 

 

June 30,

 

 

 

2017

 

 

2017

 

Raw materials

 

$

81,706

 

 

$

78,979

 

Work in progress

 

 

74,116

 

 

 

61,679

 

Finished goods

 

 

68,639

 

 

 

63,037

 

 

 

$

224,461

 

 

$

203,695

 

 

 

Note  5.

Property, Plant and Equipment

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

 

 

 

September 30,

 

 

June 30,

 

 

 

2017

 

 

2017

 

Land and land improvements

 

$

9,228

 

 

$

5,667

 

Buildings and improvements

 

 

200,774

 

 

 

144,293

 

Machinery and equipment

 

 

529,412

 

 

 

492,042

 

Construction in progress

 

 

95,594

 

 

 

88,458

 

 

 

 

835,008

 

 

 

730,460

 

Less accumulated depreciation

 

 

(374,149

)

 

 

(362,732

)

 

 

$

460,859

 

 

$

367,728

 

 

11


 

 

Note  6.

Goodwill and Other Intangible Assets

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

 

 

 

Three Months Ended September 30, 2017

 

 

 

II-VI Laser

 

 

II-VI

 

 

II- VI Performance

 

 

 

 

 

 

 

Solutions

 

 

Photonics

 

 

Products

 

 

Total

 

Balance-beginning of period

 

$

84,180

 

 

$

113,272

 

 

$

52,890

 

 

$

250,342

 

Goodwill acquired

 

 

18,307

 

 

 

-

 

 

 

-

 

 

 

18,307

 

Foreign currency translation

 

 

830

 

 

 

624

 

 

 

-

 

 

 

1,454

 

Balance-end of period

 

$

103,317

 

 

$

113,896

 

 

$

52,890

 

 

$

270,103

 

 

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

 

 

 

September 30, 2017

 

 

June 30, 2017

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

66,096

 

 

$

(28,865

)

 

$

37,231

 

 

$

65,438

 

 

$

(27,313

)

 

$

38,125

 

Trademarks

 

 

15,872

 

 

 

(1,373

)

 

 

14,499

 

 

 

15,806

 

 

 

(1,340

)

 

 

14,466

 

Customer Lists

 

 

128,237

 

 

 

(44,101

)

 

 

84,136

 

 

 

123,058

 

 

 

(41,740

)

 

 

81,318

 

Other

 

 

1,575

 

 

 

(1,536

)

 

 

39

 

 

 

1,571

 

 

 

(1,523

)

 

 

48

 

Total

 

$

211,780

 

 

$

(75,875

)

 

$

135,905

 

 

$

205,873

 

 

$

(71,916

)

 

$

133,957

 

 

Amortization expense recorded on the Company’s intangible assets was $3.6 million and $3.2 million for the three months ended  September 30, 2017 and 2016, respectively.  

In conjunction with the acquisition of Kaiam, the Company recorded $0.4 million attributed to the value of technology and patents and $4.7 million of customer lists. The intangibles were recorded based on the Company’s preliminary purchase price allocation utilizing either a discounted cash flow or relief from royalty method to derive the fair value. The valuation is expected to be finalized within one year from the date of acquisition.

Technology and patents are being amortized over a range of 60 to 240 months, with a weighted average remaining life of approximately 97 months. Customer lists are being amortized over a range of approximately 120 to 240 months with a weighted average remaining life of approximately 145 months. The gross carrying amount of trademarks 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, U.K. and Chinese subsidiaries.

At September 30, 2017, the estimated amortization expense for the existing intangible assets for each of the five succeeding fiscal years is as follows ($000):

 

Year Ending June 30,

 

 

 

 

 

 

Remaining 2018

 

 

 

$

10,678

 

2019

 

 

 

 

14,008

 

2020

 

 

 

 

13,052

 

2021

 

 

 

 

12,356

 

2022

 

 

 

 

10,903

 

 

 

12


 

Note  7.

Debt

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

 

 

September 30,

 

 

June 30,

 

 

2017

 

 

2017

 

0.25% Convertible senior notes

$

345,000

 

 

$

-

 

Convertible senior notes unamortized discount attributable to cash conversion option and debt issuance costs including initial purchaser discount

 

(65,359

)

 

 

-

 

Term loan, interest at LIBOR, as defined, plus 1.75% and 1.50%, respectively

 

80,000

 

 

 

85,000

 

Line of credit, interest at LIBOR, as defined, plus 1.75% and 1.50%, respectively

 

40,000

 

 

 

252,000

 

Credit facility unamortized debt issuance costs

 

(1,400

)

 

 

(1,491

)

Yen denominated line of credit, interest at LIBOR, as defined, plus 1.75%

 

2,667

 

 

 

2,679

 

Note payable assumed in IPI acquisition

 

3,834

 

 

 

3,834

 

Total debt

 

404,742

 

 

 

342,022

 

Current portion of long-term debt

 

(20,000

)

 

 

(20,000

)

Long-term debt, less current portion

$

384,742

 

 

$

322,022

 

 

0.25% Convertible Senior Notes

On August 24, 2017, the Company entered into a purchase agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several initial purchasers named therein (collectively, the “Initial Purchasers”), to issue and sell $300 million aggregate principal amount of our 0.25% convertible senior notes due 2022 (the "Notes") in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended. In addition, we granted the Initial Purchasers a 30-day option to purchase up to an additional $45 million aggregate principal amount of the Notes (the “Over-Allotment Option”).

On August 29, 2017, the Initial Purchasers exercised their Over-Allotment Option to purchase the entire $45 million in aggregate principal amount of additional Notes. The Notes mature on September 1, 2022, unless earlier repurchased by the Company or converted by holders in accordance with the terms of the Notes. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2018.

The sale of the Notes to the Initial Purchasers settled on August 29, 2017, and resulted in approximately $336 million in net proceeds to the Company after deducting the initial purchasers’ discount and the estimated offering expenses. The net proceeds from the offering and sale of the Notes were used, in part, to repurchase approximately $49.9 million of our Common Stock.  The Company used the remaining net proceeds to repay $257.0 million on its revolving credit facility and to pay debt issuance costs.

The Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank, National Association, as trustee. The Notes will be our senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of our indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. In the event of our bankruptcy, liquidation, reorganization or other winding up, our assets that secure secured debt will be available to pay obligations on the Notes only after all indebtedness under such secured debt has been repaid in full from such assets. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of our Common Stock or a combination of cash and shares of our Common Stock, at the Company’s election.

As a result of our cash conversion option, the Company separately accounted for the value of the embedded conversion option as a debt discount. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using an expected present value technique (income approach) to estimate the fair value of similar nonconvertible debt; the debt discount is being amortized as additional non-cash interest expense over the term of the Notes using the effective interest method with an effective interest rate of 4.4% per annum.

13


 

The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The initial conversion rate is 21.25 shares of Common Stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of $47.06 per share of Common Stock. Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events.

Holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited.

Prior to the close of the business date immediately preceding June 1, 2022, the Notes will be convertible only upon satisfaction of at least one of the conditions as follows:

 

a)

During any fiscal quarter beginning after the fiscal quarter ending on December 31, 2017 (and only during such fiscal quarter), if the last reported sale price of our Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

 

b)

During the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our Common Stock and the conversion rate on each such trading day;

 

c)

Upon the occurrence of specified corporate events

On or after June 1, 2022 until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

As of September 30, 2017, the Notes are not yet convertible. In accounting for the transaction costs related to the Note issuance, the Company allocated the total amount of offering costs incurred to the debt and equity components based on their relative values. Offering costs attributable to the debt component, totaling $8.4 million, are being amortized as non-cash interest expense over the term of the Notes, and offering costs attributable to the equity component, totaling $1.7 million, were recorded within stockholders' equity.

 

The following table sets forth total interest expense recognized related to the Notes for the three months ended September 30, 2017:

 

0.25% contractual coupon

 

$

 

78

 

Amortization of debt discount and debt issuance costs including initial purchaser discount

 

 

 

1,107

 

Interest expense

 

$

 

1,185

 

 

Amended Credit Facility

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 1.25% and if the Euro-Rate Option is selected for a borrowing, the Applicable Margin is 1.00% to 2.25%. The Applicable Margin is based on the ratio of the Company’s 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 September 30, 2017, the Company was in compliance with all financial covenants under its Amended Credit Facility.

14


 

Yen Loan

The Company’s Yen denominated line of credit is a 500 million Yen (approximately $4.4 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 1.75%. At September 30, 2017 and June 30, 2017, 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 September 30, 2017, the Company was in compliance with all financial covenants under its Yen facility.

Note Payable

In conjunction with the acquisition of IPI, the Company assumed a non-interest bearing note payable owed to a major customer of IPI. The agreement if not terminated early by either party is payable in full in May 2019.

Aggregate Availability

The Company had aggregate availability of $285.6 million and $73.5 million under its lines of credit as of September 30, 2017 and June 30, 2017, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of September 30, 2017 and June 30, 2017, total outstanding letters of credit supported by these credit facilities were $1.2 million for both periods.

Weighted Average Interest Rate

The weighted average interest rate of total borrowings was 1.8% and 2.0% for the three months ended September 30, 2017 and 2016, respectively.

Remaining Annual Principal Payments

Remaining annual principal payments under the Company’s existing credit obligations from September 30, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term

 

 

Yen Line

 

 

Line of

 

 

Note

 

 

Convertible

 

 

 

 

 

Period

 

Loan

 

 

of Credit

 

 

Credit

 

 

Payable

 

 

Notes

 

 

Total

 

Year 1

 

$

20,000

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

20,000

 

Year 2

 

 

20,000

 

 

 

-