10-Q 1 iivi-10q_20180331.htm 10-Q iivi-10q_20180331.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 March 31, 2018

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 May 2, 2018, 62,544,530 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, 2018 and June 30, 2017 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings – Three and nine months ended March 31, 2018 and 2017 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Three and nine months ended March 31, 2018 and 2017 (Unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Nine Months Ended March 31, 2018 and 2017 (Unaudited)

 

7

 

 

 

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity – Nine Months Ended March 31, 2018 (Unaudited)

 

8

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9

 

 

 

 

 

Item 2.

 

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

 

26

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

37

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

38

 

 

 

 

 

Item 1A.

 

Risk Factors

 

38

 

 

 

 

 

Item 2.

 

Issuer Purchases of Equity Securities

 

38

 

 

 

 

 

Item 6.

 

Exhibits

 

39

 

 

 

2


 

PART I - FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)

 

 

 

March 31,

 

 

June 30,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

263,244

 

 

$

271,888

 

Accounts receivable - less allowance for doubtful accounts of $1,143 at March 31, 2018 and $1,314 at June 30, 2017

 

 

192,766

 

 

 

193,379

 

Inventories

 

 

249,548

 

 

 

203,695

 

Prepaid and refundable income taxes

 

 

7,116

 

 

 

6,732

 

Prepaid and other current assets

 

 

33,471

 

 

 

26,602

 

Total Current Assets

 

 

746,145

 

 

 

702,296

 

Property, plant & equipment, net

 

 

507,690

 

 

 

367,728

 

Goodwill

 

 

274,516

 

 

 

250,342

 

Other intangible assets, net

 

 

129,142

 

 

 

133,957

 

Investments

 

 

68,222

 

 

 

11,727

 

Deferred income taxes

 

 

2,618

 

 

 

3,023

 

Other assets

 

 

8,901

 

 

 

8,224

 

Total Assets

 

$

1,737,234

 

 

$

1,477,297

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20,000

 

 

$

20,000

 

Accounts payable

 

 

77,270

 

 

 

65,540

 

Accrued compensation and benefits

 

 

53,856

 

 

 

58,178

 

Accrued income taxes payable

 

 

18,342

 

 

 

12,178

 

Other accrued liabilities

 

 

33,118

 

 

 

29,056

 

Total Current Liabilities

 

 

202,586

 

 

 

184,952

 

Long-term debt

 

 

430,992

 

 

 

322,022

 

Capital lease obligation

 

 

22,574

 

 

 

23,415

 

Deferred income taxes

 

 

27,046

 

 

 

15,345

 

Other liabilities

 

 

38,864

 

 

 

31,000

 

Total Liabilities

 

 

722,062

 

 

 

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 - 74,925,863 shares at March 31, 2018; 74,081,451 shares at June 30, 2017

 

 

346,500

 

 

 

269,638

 

Accumulated other comprehensive income (loss)

 

 

17,107

 

 

 

(13,778

)

Retained earnings

 

 

808,897

 

 

 

748,062

 

 

 

 

1,172,504

 

 

 

1,003,922

 

Treasury stock, at cost - 12,458,693 shares at March 31, 2018 and 10,940,062 shares at June 30, 2017

 

 

(157,332

)

 

 

(103,359

)

Total Shareholders' Equity

 

 

1,015,172

 

 

 

900,563

 

Total Liabilities and Shareholders' Equity

 

$

1,737,234

 

 

$

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

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

294,746

 

 

$

244,987

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

176,361

 

 

 

147,277

 

Internal research and development

 

 

30,560

 

 

 

25,380

 

Selling, general and administrative

 

 

53,087

 

 

 

43,291

 

Interest expense

 

 

5,014

 

 

 

1,936

 

Other expense (income), net

 

 

(1,496

)

 

 

(2,164

)

Total Costs, Expenses & Other Expense (Income)

 

 

263,526

 

 

 

215,720

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

31,220

 

 

 

29,267

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

1,122

 

 

 

6,837

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

30,098

 

 

$

22,430

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

0.48

 

 

$

0.36

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

0.45

 

 

$

0.35

 

 

- 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,

 

 

 

2018

 

 

2017

 

Revenues

 

$

837,719

 

 

$

698,329

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

503,926

 

 

 

418,754

 

Internal research and development

 

 

83,898

 

 

 

70,844

 

Selling, general and administrative

 

 

152,833

 

 

 

128,865

 

Interest expense

 

 

13,303

 

 

 

4,547

 

Other expense (income), net

 

 

(4,228

)

 

 

(9,611

)

Total Costs, Expenses & Other Expense (Income)

 

 

749,732

 

 

 

613,399

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

87,987

 

 

 

84,930

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

27,152

 

 

 

22,303

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

60,835

 

 

$

62,627

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

0.97

 

 

$

1.00

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

0.93

 

 

$

0.97

 

 

- 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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net earnings

 

$

30,098

 

 

$

22,430

 

 

$

60,835

 

 

$

62,627

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

15,703

 

 

 

3,002

 

 

 

30,885

 

 

 

(12,145

)

Amortization of net actuarial gains and losses, net of taxes of ($32) and $0 for the three and nine months ended March 31, 2018, respectively, and ($40) and $45 for the three and nine months ended March 31, 2017, respectively

 

 

(118

)

 

 

(149

)

 

 

-

 

 

 

163

 

Comprehensive income

 

$

45,683

 

 

$

25,283

 

 

$

91,720

 

 

$

50,645

 

 

- 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,

 

 

 

2018

 

 

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net earnings

 

$

60,835

 

 

$

62,627

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

47,157

 

 

 

35,190

 

Amortization

 

 

10,992

 

 

 

9,532

 

Share-based compensation expense

 

 

11,562

 

 

 

8,695

 

Losses (gains) on foreign currency remeasurements and transactions

 

 

789

 

 

 

(3,633

)

Earnings from equity investments

 

 

(2,607

)

 

 

(654

)

Deferred income taxes

 

 

(1,612

)

 

 

248

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

5,644

 

 

 

(8,220

)

Inventories

 

 

(33,446

)

 

 

(20,273

)

Accounts payable

 

 

12,205

 

 

 

7,610

 

Income taxes

 

 

9,558

 

 

 

2,958

 

Accrued compensation and benefits

 

 

(6,039

)

 

 

(12,387

)

Other operating net assets

 

 

(1,093

)

 

 

(3,321

)

Net cash provided by operating activities

 

 

113,945

 

 

 

78,372

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant & equipment

 

 

(116,477

)

 

 

(99,135

)

Purchases of businesses

 

 

(80,503

)

 

 

(580

)

Purchase of equity investment

 

 

(51,655

)

 

 

-

 

Other investing activities

 

 

429

 

 

 

1,707

 

Net cash used in investing activities

 

 

(248,206

)

 

 

(98,008

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of 0.25% convertible senior notes due 2022

 

 

345,000

 

 

 

-

 

Proceeds from borrowings under Credit Facility

 

 

100,000

 

 

 

64,000

 

Payments on borrowings under Credit Facility

 

 

(277,000

)

 

 

(20,000

)

Purchases of treasury stock

 

 

(49,875

)

 

 

-

 

Proceeds from exercises of stock options

 

 

8,836

 

 

 

14,625

 

Payments in satisfaction of employees' minimum tax obligations

 

 

(4,040

)

 

 

(3,407

)

Debt issuance costs

 

 

(10,061

)

 

 

(1,384

)

Net cash provided by financing activities

 

 

112,860

 

 

 

53,834

 

Effect of exchange rate changes on cash and cash equivalents

 

 

12,757

 

 

 

(5,062

)

Net (decrease) increase in cash and cash equivalents

 

 

(8,644

)

 

 

29,136

 

Cash and Cash Equivalents at Beginning of Period

 

 

271,888

 

 

 

218,445

 

Cash and Cash Equivalents at End of Period

 

$

263,244

 

 

$

247,581

 

Cash paid for interest

 

$

4,680

 

 

$

3,937

 

Cash paid for income taxes

 

$

16,588

 

 

$

16,852

 

Non-cash transactions:

 

 

 

 

 

 

 

 

Capital lease obligation incurred on facility lease

 

$

-

 

 

$

25,000

 

Additions to property, plant & equipment included in accounts payable

 

$

3,388

 

 

$

6,521

 

 

 

 

 

 

 

 

 

 

 

- 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, 2017

 

 

74,081

 

 

$

269,638

 

 

$

(13,778

)

 

$

748,062

 

 

 

(10,940

)

 

$

(103,359

)

 

$

900,563

 

Shares issued under share-based compensation plans

 

 

845

 

 

 

8,836

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,836

 

Shares acquired in satisfaction of minimum tax withholding obligations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(109

)

 

 

(4,040

)

 

 

(4,040

)

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

60,835

 

 

 

-

 

 

 

-

 

 

 

60,835

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,415

)

 

 

(49,875

)

 

 

(49,875

)

Treasury stock under deferred compensation arrangements

 

 

-

 

 

 

58

 

 

 

-

 

 

 

-

 

 

 

5

 

 

 

(58

)

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

30,885

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

30,885

 

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

 

 

-

 

 

 

56,406

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

56,406

 

Share-based compensation expense

 

 

-

 

 

 

11,562

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,562

 

Balance - March 31, 2018

 

 

74,926

 

 

$

346,500

 

 

$

17,107

 

 

$

808,897

 

 

 

(12,459

)

 

$

(157,332

)

 

$

1,015,172

 

 

- 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”, the “Company”, “we”, “us” or “our”) for the three and nine months ended March 31, 2018 and 2017 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 and nine months ended March 31, 2018 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 is 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.

9


 

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 ASU'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 continued our evaluation of the impact of the ASU in fiscal 2018 by evaluating its impact on selected contracts at each of our business units.  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 units, as well as our business processes and our information technology.  As a result, our evaluation of the effect of the ASU will continue through the end of fiscal year 2018. The Company has assessed its military related contracts that comprise approximately 10% of consolidated revenues. Under the ASU, based on the preliminary assessment, the Company will accelerate the recognition of revenues for certain 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 will be recognized at the beginning of the year of adoption.

Other Pronouncements Currently Under Evaluation

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance permits an entity to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings. 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 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, Compensation (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

10


 

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 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.

Acquisitions and Investment

CoAdna, Inc.

In March 2018, the Company announced its intention to acquire CoAdna, Inc.(“CoAdna”), a publically traded company on the Taiwan Stock Exchange and based in Sunnyvale, CA, in a cash transaction valued at approximately $85.0 million net of any cash acquired. The transaction is expected to close during the first quarter of fiscal year 2019 and is subject to the approval of CoAdna’s shareholders, regulatory approvals and customary closing conditions.

Purchase of Equity Investment

In November 2017, the Company acquired a 93.8% equity investment in a privately-held company for $51.5 million. In addition, during the quarter ended March 31, 2018, the Company paid $0.2 million for a working capital adjustment to that purchase price. The Company’s pro-rata share of earnings from this investment since the acquisition date was $0.8 million and $2.0 million, for the three and nine months ended March 31, 2018, respectively, and was recorded in other expense (income), net in the Condensed Consolidated Statements of Earnings.

This nonconsolidated investment is accounted for under the equity method of accounting (“Equity Investment”). The following table summarizes the Company's equity in the nonconsolidated investment:

 

 

 

Interest

 

Ownership % as of

 

 

Equity as of

Location

 

Type

 

March 31, 2018

 

 

March 31, 2018 ($000)

 

 

 

 

 

 

 

 

 

USA

 

Equity Investment

 

93.80%

 

 

$

 

55,841

 

 

 

The Equity Investment has been determined to be a variable interest entity because the Company has an overall 93.8% economic position in the investee comprising a significant portion of its capitalization, but has only a 25% voting interest. The Company’s obligation to receive rewards and absorb expected losses is disproportionate to its voting interest. The Company is not the primary beneficiary because it does not have the power to direct the activities of the equity investment that most significantly impact its economic performance. Certain business decisions, including, but not limited to, decisions with respect to operating budgets, material capital expenditures, indebtedness, significant acquisitions or dispositions, and strategic decisions, require the approval of owners holding a majority percentage in the Equity Investment. Beginning on the date it was acquired, the Company accounted for its interest as an equity method investment as the Company has the ability to exercise significant influence over operating and financial policies of the Equity Investment.

As of March 31, 2018, the Company’s maximum financial statement exposure related to the Equity Investment was approximately $55.8 million, which is included in the investments balance on the Condensed Consolidated Balance Sheet as of March 31, 2018.

The Company has the right to purchase all of the outstanding interest of each of the minority equity holders and the minority equity holders have the right to cause the Company to purchase all of their outstanding interests at any time on or after the third anniversary of the investment or earlier upon certain events. The purchase price is equal to the greater of: (a) (i) the product of the aggregate trailing 12-month revenues of the investment preceding the date of purchase, multiplied by (ii) a factor of 2.9 multiplied by (iii) a factor of 0.723, multiplied by (iv) the percentage interest owned by each minority equity holder and (b) $966,666. The Company performed a Monte Carlo simulation to estimate the fair value of the net put option at the investment date and recorded a liability of $2.2 million in other long-term liabilities in the Condensed Consolidated Balance Sheet at the acquisition date in accordance with ASC 815-10, Derivatives and Hedging. The fair value of the net put option is adjusted as necessary on a quarterly basis with any changes in the fair value recorded through earnings. The change in fair value of the net purchase option from the investment date to March 31, 2018 was not material.

11


 

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 and an adjustment for a purchase price reduction recorded during the quarter ended March 31, 2018 of $0.5 million. The acquisition of Kaiam provides the Company with a 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 now operates 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 II-VI Compound Semiconductor Ltd. 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

 

 

63,899

 

Intangible assets

 

 

4,046

 

Goodwill

 

 

19,198

 

Total assets acquired

 

$

93,027

 

 

 

 

 

 

Liabilities

 

 

 

 

Accounts payable

 

$

751

 

Other accrued liabilities

 

 

2,486

 

Deferred tax liabilities

 

 

10,797

 

Total liabilities assumed

 

 

14,034

 

Net assets acquired

 

$

78,993

 

 

The goodwill of $19.2 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the assembled workforce of II-VI Compound Semiconductor Ltd. None of the goodwill is deductible for income tax purposes. The Company expensed transaction costs of $0.6 million for the nine months ended March 31, 2018.

The amount of revenues of II-VI Compound Semiconductor Ltd. included in the Company’s Consolidated Statements of Earnings for the three and nine months ended March 31, 2018 was $0.9 million and $2.5 million, respectively. The amount of net losses of II-VI Compound Semiconductor Ltd. included in the Company’s Condensed Consolidated Statements of Earnings for the three and nine months ended March 31, 2018 was $4.5 million and $10.7 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 $40.1 million, net of cash acquired and a final working capital adjustment of $0.8 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

 

$

40,098

 

Working capital adjustment

 

 

848

 

Fair value of cash earnout arrangement

 

 

2,215

 

Purchase price

 

$

43,161

 

 

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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

 

 

11,235

 

Intangible assets

 

 

23,554

 

Goodwill

 

 

17,514

 

Total assets acquired

 

$

58,676

 

 

 

 

 

 

Liabilities

 

 

 

 

Accounts payable

 

$

847

 

Other accrued liabilities

 

 

1,032

 

Long-term debt assumed

 

 

3,834

 

Deferred tax liabilities

 

 

9,802

 

Total liabilities assumed

 

 

15,515

 

Net assets acquired

 

$

43,161

 

 

The goodwill of $17.5 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 of IPI included in the Company’s Condensed Consolidated Statements of Earnings for the three and nine months ended March 31, 2018 was $4.9 million and $15.2 million, respectively. The amount of net earnings of IPI included in the Company’s Consolidated Statements of Earnings for the three and nine months ended March 31, 2018 was $1.1 million and $2.5 million, respectively.

 

 

Note 4.

Inventories

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

 

 

 

March 31,

 

 

June 30,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

90,752

 

 

$

78,979

 

Work in progress

 

 

93,614

 

 

 

61,679

 

Finished goods

 

 

65,182

 

 

 

63,037

 

 

 

$

249,548

 

 

$

203,695

 

 

 

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Note 5.

Property, Plant and Equipment

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

 

 

 

March 31,

 

 

June 30,

 

 

 

2018

 

 

2017

 

Land and improvements

 

$

9,445

 

 

$

5,667

 

Buildings and improvements

 

 

217,300

 

 

 

144,293

 

Machinery and equipment

 

 

598,108

 

 

 

492,042

 

Construction in progress

 

 

91,184

 

 

 

88,458

 

 

 

 

916,037

 

 

 

730,460

 

Less accumulated depreciation

 

 

(408,347

)

 

 

(362,732

)

 

 

$

507,690

 

 

$

367,728

 

 

 

Note 6.

Goodwill and Other Intangible Assets

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

 

 

 

Nine Months Ended March 31, 2018

 

 

 

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

 

 

19,198

 

 

 

-

 

 

 

-

 

 

 

19,198

 

Goodwill adjustment for prior year acquisition - IPI

 

 

-

 

 

 

407

 

 

 

-

 

 

 

407

 

Foreign currency translation

 

 

2,235

 

 

 

2,334

 

 

 

-

 

 

 

4,569

 

Balance-end of period

 

$

105,613

 

 

$

116,013

 

 

$

52,890

 

 

$

274,516

 

 

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of March 31, 2018 and June 30, 2017 were as follows ($000):

 

 

 

March 31, 2018

 

 

June 30, 2017

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

67,339

 

 

$

(32,349

)

 

$

34,990

 

 

$

65,438

 

 

$

(27,313

)

 

$

38,125

 

Trademarks

 

 

16,051

 

 

 

(1,438

)

 

 

14,613

 

 

 

15,806

 

 

 

(1,340

)

 

 

14,466

 

Customer Lists

 

 

128,399

 

 

 

(48,882

)

 

 

79,517

 

 

 

123,058

 

 

 

(41,740

)

 

 

81,318

 

Other

 

 

1,579

 

 

 

(1,557

)

 

 

22

 

 

 

1,571

 

 

 

(1,523

)

 

 

48

 

Total

 

$

213,368

 

 

$

(84,226

)

 

$

129,142

 

 

$

205,873

 

 

$

(71,916

)

 

$

133,957

 

 

Amortization expense recorded on the Company’s intangible assets was $3.6 million and $11.0 million for the three and nine months ended March 31, 2018, respectively, and was $3.1 million and $9.5 million for the three and nine months ended March 31, 2017, respectively.

In conjunction with the acquisition of II-VI Compound Semiconductors Ltd., the Company recorded $0.4 million attributed to the value of technology and patents and $3.6 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.

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Technology and patents are being amortized over a range of 60 to 240 months, with a weighted average remaining life of approximately 93 months. Customer lists are being amortized over a range of approximately 120 to 240 months with a weighted average remaining life of approximately 142 months. The gross carrying amount of trademarks includes $14.3 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 March 31, 2018, the estimated amortization expense for the existing intangible assets for each of the five succeeding fiscal years is as follows ($000):

 

Fiscal Year Ending June 30,

 

Amount

 

Remaining 2018

 

$

3,500

 

2019

 

 

14,000

 

2020

 

 

13,000

 

2021

 

 

12,300

 

2022

 

 

10,900

 

 

Note 7.

Debt

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

 

 

March 31,

 

 

June 30,

 

 

2018

 

 

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

 

(59,450

)

 

 

-

 

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

 

70,000

 

 

 

85,000

 

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

 

90,000

 

 

 

252,000

 

Credit facility unamortized debt issuance costs

 

(1,217

)

 

 

(1,491

)

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

 

2,825